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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
    For the fiscal year ended December 31, 2022
     
  OR
     
  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
    For the Transition Period from _________________________

 

Commission File No. 001-32404

 

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

 

delaware   06-1529524

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1960 S. 4250 West

Salt Lake City, Utah 84104

(Address of principal executive office)

 

Registrant’s telephone number, including area code (800) 560-3983

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.001   PTE   NASDAQ Capital Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b).

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

The aggregate market value of the common stock held by non-affiliates as of June 30, 2022, was $7,013,749.

 

The outstanding number of shares of common stock as of March 20, 2023, was 7,323,755.

 

Documents incorporated by reference: None.

 

 

 

   
 

 

TABLE OF CONTENTS

 

    Page
PART I    
Item 1. Business 4
Item 1A. Risk Factors 19
Item 1B. Unresolved Staff Comments 32
Item 2. Properties 32
Item 3. Legal Proceedings 34
Item 4. Mine Safety Disclosures 35
PART II  
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 35
Item 6. [Reserved] 35
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
Item 9A. Controls and Procedures 41
Item 9B. Other Information 42
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 42
PART III    
Item 10. Directors, Executive Officers and Corporate Governance 43
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 51
Item 13. Certain Relationships and Related Transactions, and Director Independence 52
Item 14. Principal Accountant Fees and Services 52
PART IV  
Item 15. Exhibits, Financial Statement Schedules 53
Item 16. Form 10-K Summary 56

 

As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our wholly owned Nevada subsidiaries (direct and indirect), PolarityTE, Inc., PolarityTE MD, Inc., Arches Research, Inc., Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property LLC., unless otherwise indicated or required by the context.

 

POLARITYTE, the PolarityTE Logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, COMPLEX SIMPLICITY, IBEX, ARCHES, and SKINTE are all trademarks or registered trademarks of PolarityTE. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.

 

In April 2022, the business historically operated under the name “IBEX” was sold, together with the trademark IBEX, to an unrelated third party, so references to the Company for periods after April 29, 2022, do not include IBEX Preclinical Research, Inc., or the business historically operated under the name “IBEX.”

 

 2 
 

 

Forward-looking Statements

 

This Annual Report on Form 10-K contains forward-looking statements. Risks and uncertainties are inherent in forward-looking statements. Furthermore, such statements may be based on assumptions that fail to materialize or prove incorrect. Consequently, our business development, operations, and results could differ materially from those expressed in forward-looking statements made in this Annual Report. We make such forward-looking statements pursuant to the safe harbor provisions in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Annual Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

  our ability to raise capital to fund our operations;
  the timing or success of obtaining regulatory licenses or approvals for initiating clinical trials or marketing our products;
  the initiation, timing, progress, cost, and results of clinical trials under our open IND for DFUs;
  the initiation, timing, progress, cost, and results of other INDs for SkinTE in additional indications and the clinical trials that may be required under those INDs;
  sufficiency of our working capital to fund our operations in the near and long term, which raises doubt about our ability to continue as a going concern;
  infrastructure required to support operations in future periods, including the expected costs thereof;
  estimates associated with revenue recognition, asset impairments, and cash flows;
  variance in our estimates of future operating costs;
  future vesting and forfeitures of compensatory equity awards;
  the effectiveness of our disclosure controls and our internal control over financial reporting;
  the impact of new accounting pronouncements;
  size and growth of our target markets; and
  the initiation, timing, progress, and results of our research and development programs.

 

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:

 

  the need for, and ability to obtain, additional financing in the future;
  the ability to comply with regulations applicable to the development, production, and distribution of SkinTE;
  the timing and requirements associated with obtaining FDA acceptance of our second clinical trial;
  the ability to obtain subject enrollment in our trials at a pace that allows the trials to progress on the schedules we have established with our CRO;
  unexpected developments or delays in the progress of our clinical trials;
  the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology;
  the ability to gain adoption by healthcare providers of our products for patient care;
  developments relating to our competitors and industry;
  new discoveries or the development of new therapies or technologies that render our products or services obsolete or unviable;
  the ability to find and retain skilled personnel;
  outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade, and business operations;
  political and economic instability, whether resulting from natural disasters, wars (such as the conflict between Russia and Ukraine), terrorism, pandemics, or other sources;
  changes in economic conditions, including inflation, rising interest rates, lower consumer confidence, and volatile equity capital markets;
  inaccuracies in estimates of our expenses, future revenues, and capital requirements;
  future accounting pronouncements; and
  unauthorized access to confidential information and data on our information technology systems and security and data breaches.

 

Forward-looking statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Any forward-looking statement in this Annual Report on Form 10-K and the documents incorporated by reference herein reflects our current view with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Annual Report on Form 10-K also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

 

 3 
 

 

PART I

 

Item 1. Business.

 

Overview

 

PolarityTE, Inc., headquartered in Salt Lake City, Utah, is a biotechnology company developing regenerative tissue products and biomaterials. Our first regenerative tissue product is SkinTE. On July 23, 2021, we submitted an investigational new drug application (“IND”) for SkinTE to the U.S. Food and Drug Administration (the “FDA”) through our subsidiary, PolarityTE MD, Inc. (“PTE-MD”), as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. FDA approval of the IND was given in January 2022, which allowed us to commence the first of two pivotal studies needed to support a biologics license application (“BLA”). Our first pivotal study under our IND is a multi-center, randomized controlled trial evaluating SkinTE in the treatment of diabetic foot ulcers (“DFUs”) classified as Grade 2 in the Wagner classification system entitled “Closure Obtained with Vascularized Epithelial Regeneration for DFUs with SkinTE,” or “COVER DFUs Trial.”

 

In March 2022, we submitted to the FDA a request for a Regenerative Medicine Advanced Therapy (“RMAT”) designation for SkinTE under our IND. Established under the 21st Century Cures Act, RMAT designation is a dedicated program designed to expedite the drug development and review processes for promising regenerative medicine products, including human cellular and tissue-based therapies. A regenerative medicine therapy is eligible for RMAT designation if it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the drug or therapy has the potential to address unmet medical needs for such disease or condition. RMAT designation provides the benefits of intensive FDA guidance on efficient drug development, including the ability for early interactions with the FDA to discuss potential ways to support accelerated approval and satisfy post-approval requirements, potential priority review of a BLA, and other opportunities to expedite development and review. In May 2022, we were advised by the FDA that it concluded SkinTE meets the criteria for RMAT designation for the treatment of DFUs and venous leg ulcers (“VLUs”).

 

Since the beginning of 2017, we have incurred substantial operating losses and our operations have been financed primarily by public equity financings. The clinical trials for SkinTE and the regulatory process will likely result in an increase in our costs in the foreseeable future, we expect we will continue to incur substantial operating losses as we pursue an IND and BLA, and we expect to seek financing from external sources over the foreseeable future to fund our operations.

 

SkinTE

 

The Importance of Skin

 

Skin has several functions. It provides a barrier to water loss and pathogens, and protects against diverse forms of trauma, including thermal, chemical, and ultraviolet radiation. Skin keeps us in touch with our environment through a host of nerve endings, regulates body temperature, and enhances metabolic functions. Skin is an active immune organ functioning as a first line of defense against a wide spectrum of common pathogens encountered on a regular basis. Biosynthesis of melanin in the skin reduces the harmful effects of ultraviolet light. Skin is a ready source of vitamin D, which plays an important role in maintaining healthy levels of serum calcium and resorption of bone.

 

The clinical significance of skin is illustrated by the morbidity associated with chronic wounds, burns, and cutaneous defects. A 12-month prospective observational study of diabetic foot ulcers first published in Diabetic medicine: a journal of the British Diabetic Association in 2018 reported that out of a group of 299 patients, 17.4% had some sort of amputation of the foot and 6.0% of the 299 patients underwent revascularization surgery. A report published on Medscape in June 2018 states that pressure injuries are listed as the direct cause of death in 7-8% of all patients with paraplegia. And according to statistics collected by the National Burn Repository, the mortality rate from 2008 to 2017 among burn patients treated at surveyed burn centers is approximately 3%. We believe that the regeneration of full-thickness skin with all the processes and appendages that enable it to perform its vital functions is critical to long-term, positive patient outcomes following serious skin injury.

 

 4 
 

 

Limitations of Other Skin Treatment Therapies

 

Current clinical standards and practice adhere to the concept that skin should be replaced with skin whenever possible in settings where patients have suffered the loss of such tissue. Understanding this, medical professionals are left with a decision to attempt to temporize a wound bed with an autograft (using the patient’s own skin in a skin graft), an allograft (using human skin from a donor), or a variety of skin substitutes to provide a skin-like barrier while the margin of the wound heals through secondary intention and contraction. Historically, harvest and placement of autologous full-thickness skin results in the best outcome within wound beds because it most closely resembles the full-thickness skin that was lost. However, full-thickness harvest of skin also results in a full-thickness skin defect at the donor site, which requires primary closure (skin edge approximation and suturing) so as not to leave a gaping wound behind. Because of this absolute limit on how much autologous full-thickness donor skin can be harvested without leaving behind a non-closable wound, medical professionals can only harvest small, elliptically shaped pieces of such skin from areas of redundancy, which is termed full-thickness skin grafting (“FTSG”).

 

It is because there remains only a finite supply of FTSG donor material and sites that medical professionals often rely on the harvest of split-thickness skin grafts (“STSG”) for coverage of voids of the integument to get better coverage and more skin. STSGs, however, do not represent the true anatomy or function of native skin because STSG harvest procedures commonly take the top 1/100th of an inch of the patient’s own skin and therefore do not capture all the necessary cellular and tissue components and structures required for the regeneration of normal skin. Because of the failure to harvest all the necessary skin structures and components from the STSG donor site, the patient is left with an incomplete top layer of skin covering the initial defect (recipient site) and a remaining bottom layer at the donor site. In this setting, both donor and recipient sites contain incomplete skin, which often results in dysfunctional, painful scar tissues and lifelong morbidities.

 

Due to the limits of STSG and FTSG and the type of procedures required for such harvests, the industry has continued to investigate skin substitutes and skin alternatives that can be used in place of native skin. Among these alternatives or options are a cultured epithelial autograft (a form of manipulated autograft), allograft (tissue grafts derived from a donor of the same species as the recipient but not genetically identical), xenograft (a tissue graft or organ transplant from a donor of a different species from the recipient), and engineered skin substitutes. To our knowledge, none of these substitutes have been able to regenerate the cutaneous appendages (e.g., hair follicle, sweat gland, sebaceous glands, etc.), which are necessary for the development of full-thickness, normal skin.

 

Our Solution - SkinTE

 

The core technology of SkinTE is minimally polarized functional units (“MPFUs”). MPFUs are multi-cellular segments created from a piece of the patient’s healthy skin. SkinTE allows the patient to regenerate full-thickness, three-dimensional skin (similar to a FTSG) by contributing a much smaller skin sample, while reducing the scarring and morbidities associated with STSGs, and producing results we believe to be superior to STSGs and synthetic skin substitutes. SkinTE can be utilized by a variety of health care providers in an operating room, wound clinic, or doctor’s office. The process begins with the collection of a skin sample from the patient and shipping the sample in a temperature-controlled shipping box to our FDA-regulated biomedical manufacturing facility. The harvested skin is used to manufacture SkinTE, which is expeditiously returned for application to the patient’s wound. Processing of the skin creates multi-cellular segments that are optimized for grafting, which retain the progenitor cells found throughout the skin, including the hair follicles. The product is not cultured or expanded ex-vivo, and no enzymes, growth factors, or serum derivatives are utilized during manufacturing. The final product, SkinTE, is delivered in a syringe and has the consistency of a paste. Following wound bed preparation, SkinTE is spread evenly across the entire surface of the wound and engrafts within the wound in a similar manner to traditional skin grafts. Once integrated with the wound bed, the product expands and regenerates full-thickness skin across the entire surface.

 

Given our significant real-world experience with SkinTE in clinical settings for a variety of wounds and several supporting publications, we believe SkinTE can be successful in closing full-thickness complex wounds, such as DFUs penetrating to tendon, capsule, and bone classified Wagner Grades 2 through 4; Stage 3 and 4 pressure injuries; and, acute wounds. Full-thickness DFUs that penetrate to deep structures are best classified as University of Texas Grades 2 and 3, corresponding to Wagner Grades 2 through 4, and are at the highest risk for progressing to amputation with very few treatment options and a paucity of high-level data related to current treatment options. Similarly, Stage 3 pressure injuries involve the entire thickness of the skin and Stage 4 pressure injuries have exposed muscle, tendon, or bone. Due to limited reliable solutions, these injuries affect a large number of people for extended periods of time. We believe that focusing our efforts in these hard-to-treat wound types, where there are significant unmet needs, can deliver substantial positive impacts in patients’ lives and value for the SkinTE franchise for several reasons.

 

 5 
 

 

  Although these distinct wound types may occur in patients with different demographics and have different etiologies, they have common characteristics including significant wound depth, significant wound volume, frequent presence of tunneling and undermining, and exposure of critical structures.
  Wounds with these characteristics often require multiple treatment stages to fill volume and cover exposed structures before proceeding to traditional skin grafts or more invasive reconstruction. There is a paucity of high-level data to guide the progression through these treatment options.
  In our experience, wound care providers are focused on finding better treatments due to their unaddressed challenges and the seriousness of their outcomes, where failure of treatments may result in both the acute occurrence and elevated lifetime risk of amputation, long-term disability, and death.

 

Clinically, we believe SkinTE is highly differentiated from current treatment alternatives in these hard-to-treat wound types. In real-world experience and data from preliminary studies conducted to date, we believe that SkinTE has covered exposed critical structures, completely filled in wound depth including tunneling, and ultimately provided complete and durable wound closure with the regenerated tissue having many of the important characteristics of native skin such as pliability, strength, sensation, ability to sweat, and hair growth. In contrast to a multi-staged approach combining numerous treatments in an algorithm dictated by wound progression, SkinTE can be applied directly into deep wounds with exposed structures, typically requires only a single application in the vast majority of cases and, unlike other products in this space, may not require a skin graft to achieve final closure. In our experience, providers treating complex wounds are most concerned with reliably covering deep structures, as this mitigates a substantial risk factor for the patient and converts the wound to a lower grade that is more manageable. We believe that covering deep structures and filling wound volume with newly generated vascular tissue is an important advantage of SkinTE and differentiates SkinTE from other treatments that have increased failure rates in these hard-to-treat wound settings. Another valuable aspect of SkinTE clinically is that it is created from a relatively small skin harvest that is well tolerated by the patient.

 

We believe that patients with complex wounds face significant unmet needs, and that providers are motivated to better address them. If future clinical trials conducted under our IND demonstrate outcomes similar to those observed in real-world experience and preliminary clinical studies, we believe that SkinTE has the potential to shift practice patterns, accelerate adoption, and capture a significant portion of these hard-to-treat wound markets.

 

Clinical Trials

 

Under the SkinTE IND

 

Our IND for SkinTE was opened in January 2022. Our first pivotal study under the IND is the COVER DFUs Trial. We plan to enroll up to 100 subjects at up to 20 sites in the U.S. in the COVER DFUs Trial, which will compare treatment with SkinTE plus the standard-of-care to the standard-of-care alone. The primary endpoint is the incidence of DFUs closed at 24 weeks. Secondary endpoints include percent area reduction (“PAR”) at 4, 8, 12, 16, and 24 weeks, improved quality of life, and new onset of infection of the DFU being evaluated. We have been enrolling subjects in the COVER DFUs Trial since the end of April 2022, and we expect the study will be fully enrolled sometime in the first six months of 2024. Additionally, there is an interim analysis planned for the first 50 patients and we believe that data will be available in late 2023 or early 2024.

 

As a result of the RMAT designation received in May 2022, we were able to engage in an expedited dialogue with the FDA on the tasks that are likely to be necessary to support a BLA submission for SkinTE as a treatment of DFUs. Based on that dialogue we plan to run a second multi-center, randomized controlled trial under our current IND to support approval of a broad DFU indication for SkinTE in a BLA, and we plan to engage in discussions with the FDA regarding the design and implementation of the second clinical trial. We believe this strategy will be the fastest and least costly approach to achieving our first BLA submission for SkinTE, with DFUs representing the largest market opportunity within the category of chronic cutaneous ulcers. We plan to further engage with the FDA to fully define our development plan for other wound indications.

 

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In June 2021 we engaged a contract research organization (“CRO”) to provide services for the COVER DFUs Trial at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In 2021 we prepaid $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the COVER DFUs Trial the service provider will submit to us for payment monthly invoices for units of work stated in the work order that are completed and billable expenses incurred.

 

Pre-IND

 

PolarityTE conducted several clinical trials before it filed its IND for SkinTE, which were conducted on a post-marketing basis with SkinTE as a 361 HCT/P. These clinical trials include the following:

 

Burns and Traumatic Wounds

 

We initiated a head-to-head trial comparing SkinTE to the STSG, the clinical standard of care, in the first quarter of 2018. Eight patients were enrolled in the trial and the primary endpoint for the trial was graft take. Data from the trial was published in the Journal of Burn Care & Research in September 2020. Eight patients with deep-partial/full thickness burns had a portion of their wounds treated with SkinTE and the remainder of their burn treated with split-thickness skin grafting. The SkinTE treated wounds had graft take and achieved closure by their last follow-up with a single application. A single adverse event at a SkinTE harvest site secondary to a dehiscence (technical error) occurred requiring secondary closure at the time of the patient’s definitive grafting procedure. There were no other adverse events pertaining to the SkinTE applications in the trial.

 

Diabetic Foot Ulcer (DFU) Trials

 

DFUs are chronic wounds and represent one of the costliest, and medically significant, health related morbidities encountered during a patient’s lifetime. The estimated annual U.S. payor burden of DFU ranges from $9.1 billion to $13.2 billion according to a 2014 article in Diabetes Care, a publication of the American Diabetes Association. The outpatient management of DFUs represents the major contributing cost to the health care system. Inadequate assessment and management with chronicity of treatment is one of the primary cost drivers and failures of care.

 

SkinTE was used to treat 10 patients (11 DFUs) in a pilot trial completed in June 2019, and first reported at the Symposium on Advanced Wound Care Fall 2019. The following are the results as determined by independent review:

 

  10 of 11 (90.9%) DFUs healed within eight weeks of a single application of SkinTE
  Median time to closure was 25 days
  DFU sizes ranged from 1.0 to 21.7 cm2
  One patient was removed from the study at week three due to adverse events not related to the study or SkinTE procedure
  No SkinTE-related adverse reactions were observed

 

After that trial, we conducted a multicenter, randomized controlled trial evaluating SkinTE plus standard of care (“SOC”) compared to SOC alone in treatment of diabetic foot ulcers [NCT03881254] (the “DFU RCT”). In July 2021, we announced final data from the DFU RCT. The size of the study was 100 patients who were evaluated across 13 sites, with 50 participants receiving SkinTE plus SOC and 50 receiving SOC alone. The primary endpoint was percentage of ulcers closed at 12 weeks. A secondary endpoint was percent area reduction (“PAR”) at 4, 6, 8, and 12 weeks.

 

The trial met the primary endpoint of wound closure at 12 weeks and secondary endpoint of PAR assessed at 4, 6, 8, 10, and 12 weeks. Final analysis of the DFU RCT shows the following:

 

  Primary Endpoint: 70% (35/50) of participants receiving SkinTE plus SOC had wound closure at 12 weeks versus 34% (17/50) of participants receiving SOC alone (p=0.00032)
  Secondary Endpoint: Percent Area Reduction (PAR) assessed at 4, 6, 8, 10, and 12 weeks was significantly greater for the SkinTE plus SOC treatment group vs SOC alone (p=0.009)
  90% (45/50) of SkinTE plus SOC treated participants received a single application of SkinTE
  Treatment with SkinTE plus SOC increased the odds of wound closure by 5.37 times versus SOC alone (p=0.001)

 

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Mean (SD) values for PAR at weeks 4, 6, 8, 10, and 12 by treatment group were:

 

Week  SkinTE   SOC 
4   74.0 (27.63)    22.0 (149.92) 
6   82.9 (26.35)    21.2 (160.60) 
8   80.7 (35.16)    26.8 (147.42) 
10   79.7 (54.07)    45.6 (114.18) 
12   84.3 (39.46)    50.5 (92.24) 

 

Venous Leg Ulcer (“VLU”) Trials

 

VLUs are a type of chronic wound and constitute a significant burden on the worldwide health care system and are often refractory to treatment. Up to one-third of treated patients experience four or more episodes of recurrence. Delivering all the elements of native skin can potentially reduce the recurrence rate.

 

SkinTE was used to treat 10 patients in a pilot trial completed in September 2019, and first reported at the Symposium on Advanced Wound Care Fall 2019, where PolarityTE received recognition as Best Abstract. The following are the results as determined by independent review:

 

  8 of 10 (80%) VLUs closed within 12 weeks of a single application of SkinTE;
  Of the two VLUs not deemed closed within 12 weeks: one VLU was the largest in the study (12.2cm2), and closed within 13.5 weeks post a single application of SkinTE; one VLU was previously deemed closed, and reopened prior to the two-week durability visit as a result of external factors unrelated to the SkinTE procedure;
  Median time to closure was 21 days; and
  No SkinTE-related adverse reactions were observed

 

We started a multicenter, randomized controlled trial evaluating SkinTE versus standard of care in treatment of VLU [NCT03881267] (“the “VLU-RCT”), but decided in the first quarter of 2021 to suspend that trial after 29 patients were enrolled because we believed that our resources would be better used in future clinical trials conducted under an IND that can be used in our eventual planned BLA submission. In February 2022, we announced final data from the VLU RCT. The 29 patients who were evaluated across 10 sites, with 14 participants receiving SkinTE plus SOC and 15 receiving SOC alone. The primary endpoint was percentage of ulcers closed at 12 weeks. A secondary endpoint was PAR at 4, 6, 8, and 12 weeks.

 

The trial met the primary endpoint of wound closure at 12 weeks and secondary endpoint of PAR assessed at 4, 6, 8, 10, and 12 weeks. Final analysis of the VLU RCT shows the following:

 

  Primary Endpoint: 71% (10/14) of participants receiving SkinTE plus SOC had wound closure at 12 weeks versus 33% (5/15) of participants receiving SOC alone (p=0.046)
  Secondary Endpoint: PAR assessed at 4, 6, 8, 10, and 12 weeks was significantly greater for the SkinTE plus SOC treatment group vs SOC alone (p=0.000035)
  93% (13/14) of SkinTE plus SOC treated participants received a single application of SkinTE

 

Mean (SD) values for PAR at weeks 4, 6, 8, 10, and 12 by treatment group were:

 

Week   SkinTE   SOC
4     61.7 (53.13)       19.7 (77.03)  
6     70.1 (52.43)       21.4 (96.36)  
8     79.1 (51.97)       33.5 (89.10)  
10     82.0 (50.81)       42.8 (68.60)  
12     82.6 (50.52)       65.4 (43.98)  

 

Market Opportunity

 

The primary markets for SkinTE are wounds from traumatic injury, chronic wounds (including DFUs, VLUs, and pressure ulcers), burn wounds, and acute wounds, such as traumatic wounds, and wounds from surgical procedures. The following is some information on potential markets for SkinTE.

 

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  We believe SkinTE is suitable for treating a number of acute wounds. An analysis of the Medicare 5% dataset for 2014 of all wound categories, including acute and chronic wounds, showed that about 8.2 million Medicare beneficiaries had at least one type of wound or related infection, Medicare cost projections for all wounds ranged from $28.1 billion to $96.8 billion, surgical wounds and diabetic ulcers were the most expensive to treat, and outpatient costs ($9.9–$35.8 billion) were higher than inpatient costs ($5.0–$24.3 billion).
  The National Diabetes Statistics Report published in 2020 by the Centers for Disease Control stated that there are approximately 34.2 million diabetes sufferers in the United States. A 2005 article estimated the number of DFUs at between 1.2 and 3.0 million, and a 2020 article estimates the prevalence of unhealed DFUs after 12 weeks of conventional treatment at approximately 41%. The estimated annual US payor burden of DFU ranges from $9.0 billion to $13.0 billion according to a 2014 article in Diabetes Care.
  A 2010 article reports the prevalence of venous ulcers at approximately 600,000 annually, and a subsequent 2014 article reports that on average between 33% and 66% of these ulcers persist for six weeks and are, therefore, referred to as chronic, resulting in approximately 200,000 to 360,000 patients per year that we believe would be potential candidates for treatment with SkinTE.
  Pressure Ulcers are common in hospital systems, increase patient morbidity and mortality, and are costly for patients and the healthcare system. In 2012 the Agency for Healthcare Research & Quality (AHRQ) reported that there are more than 2.5 million individuals that develop pressure ulcers annually, the aggregate annual cost in the U.S. of individual care for pressure ulcers ranges between $9.1 billion and $11.6 billion, and the cost of individual patient care ranges from $20,900 to $151,700.
  The American Burn Association estimates that every year over 450,000 serious burn injuries occur in the United States that require medical treatment and that approximately 40,000 of these result in hospitalization.

 

Potential Product Enhancements or Additions

 

SkinTE Point-of-Care Device

 

Our SkinTE point-of-care device is intended to permit the processing and deployment of SkinTE immediately following the initial harvest at the point-of-care. This device is in the development stage.

 

SkinTE Cryo

 

SkinTE Cryo allows PolarityTE to offer multiple deployments from one original harvest through a cryopreservation process. Using one harvest for multiple deployments may improve patient treatment when a patient is susceptible to multiple chronic wounds, the provider suspects a patient might require a second deployment of SkinTE due to past non-compliance with rehab protocols, or the provider elects to use a staged deployment on a patient with a large wound due to wound location or other therapeutic circumstances. SkinTE Cryo is in the development stage and is a long-term development project.

 

Other Tissue Regeneration Products

 

We believe our innovative technologies may be platforms for developing therapies that address a variety of indications, including bone, cartilage, muscle, blood vessels, and neural elements, as well as solid and hollow organ composite tissue systems.

 

For the foreseeable future we intend to apply our business and financial resources to the SkinTE IND and BLA and development work on SkinTE POC, and we have at this time put on hold further work on other product development.

 

Manufacturing

 

PolarityTE maintains at its facility in Salt Lake City, Utah, manufacturing processes and quality systems that allow it to receive a skin specimen, qualify the incoming tissue, process and manufacture the SkinTE tissue product, and perform outgoing quality control and quality assurance work prior to shipping. PolarityTE validated its manufacturing process as being aseptic. All SkinTE is manufactured within an ISO 5 certified isolator located within an ISO 7 certified cleanroom. PolarityTE’s processes are designed and validated to prevent the spread of communicable disease, and to prevent cross-contamination between samples, and its quality systems comply with current Good Tissue Practices (“cGTP”) under 21 C.F.R. Part 1271.

 

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PolarityTE is modifying its operational and quality management systems to comply with cGMP under requirements of the Federal Food, Drug and Cosmetic Act, as well as under 21 C.F.R. Parts 210 and 211, and other applicable regulations, which are in addition to cGTP referenced above.

 

Suppliers

 

As part of PolarityTE’s strategy of ensuring timely delivery of its products, it has avoided relying on any third-party supplier as a sole source vendor for any element of its production process. PolarityTE has identified alternate suppliers and, where appropriate, supply alternatives for any sourcing need.

 

Intellectual Property

 

As we advance our technologies, product, and pipeline developments, we seek to apply a multilayered approach for protecting intellectual property relating to our innovation with patents (utility and design), copyrights, trademarks, as well as know-how and trade secret protection. We are actively seeking U.S. and foreign patent protection in selected jurisdictions for our MPFU technology. We have a number of patents issued and pending applications allowed in the United States and abroad related to our MPFU technology, including U.S. Patent No. 10,926,001 issued on February 23, 2021; U.S. Patent No. 11,000,629 issued on May 11, 2021; U.S. Patent No. 11,266,765 issued on March 8, 2022; U.S. Patent No. 11,338,060 issued on May 24, 2022, and U.S. Patent Application No. 17/723,748 filed April 19, 2022. Each of U.S. Patent Nos. 10,926,001; 11,000,629; 11,266,765; and 11,338,060 have an estimated expiration date of November 30, 2035.

 

Patent terms extend for varying periods of time according to the date of patent filing or grant and the pertinent law in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage, and the availability of legal remedies in the country. Further, patent term extension may be available in certain countries to compensate for a regulatory delay in approval of certain products.

 

The U.S. healthcare legislation enacted in 2010 created an approval pathway for biosimilar versions of innovative biological products that did not previously exist. Prior to that time, innovative biologics had essentially unlimited regulatory exclusivity. Under the new regulatory mechanism, the FDA can approve products that are similar to (but not generic copies of) innovative biologics on the basis of less extensive data than is required by a full BLA. After an innovator has marketed its product for four years, any manufacturer may file an application for approval of a “biosimilar” version of the innovator product. However, although an application for approval of a biosimilar may be filed four years after approval of the innovator product, qualified innovative biological products will receive 12 years of regulatory exclusivity, meaning that the FDA may not approve a biosimilar version until 12 years after the innovative biological product was first approved by the FDA. The law also provides a mechanism for innovators to enforce the patents that protect innovative biological products and for biosimilar applicants to challenge the patents. Such patent litigation may begin as early as four years after the innovative biological product is first approved by the FDA.

 

In the United States, the increased likelihood of generic and biosimilar challenges to innovators’ intellectual property has increased the risk of loss of innovators’ market exclusivity. First, generic companies have increasingly sought to challenge innovators’ basic patents covering major pharmaceutical products. Second, statutory and regulatory provisions in the United States limit the ability of an innovator company to prevent generic and biosimilar drugs from being approved and launched while patent litigation is ongoing. As a result of all these developments, it is not possible to predict the length of market exclusivity for a particular product with certainty based solely on the expiration of the relevant patent(s) or the current forms of regulatory exclusivity.

 

In striving to protect the proprietary technology, inventions, and improvements that are commercially important to the development of our business, we also rely heavily on trade secrets relating to our proprietary technology and on know-how. We enter into confidentiality agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information technology systems.

 

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We previously filed patent applications in 2018 and 2019 for our Complex Living Interface Coordinated Self-Assembling Materials technology, our Composite-Interfacing, Biomaterial Accelerant Substrate technology, and our Biological Sample Harvest and Deployment Kits. In 2022 we made the decision to abandon pursuing the applications for these technologies based on our evaluation of the difficulties and costs of obtaining allowance of the applications and our view of the value of patent protection for the technologies in the context of our operations.

 

We seek to complement the protection of our innovation with a portfolio of trademarks and service marks in the United States and around the world. The POLARITYTE trademark has been registered in the United States and in other countries throughout the world. Additional registered trademarks in the United States include our logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, and SKINTE.

 

Competition

 

The regenerative medicine industry is characterized by rapidly advancing technologies, intense competition, and a strong emphasis on intellectual property. We face substantial competition from companies developing and selling regenerative medicine products, as well as academic research institutions, governmental agencies, and public and private research institutions. Many of our current or potential competitors, either alone or with their collaboration partners, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

 

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer or less severe side effects, are more convenient, or are less expensive than products that we develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. The key competitive factors affecting the success of our programs are likely to be their efficacy, safety, convenience, price, and the availability of reimbursement from government and other third-party payers.

 

Government Regulation

 

FDA and Marketing Approval

 

In the U.S., the FDA regulates biological products under the Federal Food, Drug, and Cosmetic Act (“FDCA”), the Public Health Service Act, and various federal regulations. These FDA-regulated products are also subject to state and local statutes and regulations, as well as applicable laws or regulations in foreign countries. The FDA, and comparable regulatory agencies in state and local jurisdictions and in foreign countries, impose substantial requirements on the research, development, testing, manufacture, quality control, labeling, packaging, storage, distribution, record-keeping, approval, post-approval monitoring, advertising, promotion, marketing, sampling, and import and export of FDA-regulated products. Failure to comply with the applicable requirements at any time during the development process, approval process, or after approval may subject an applicant to administrative or judicial sanctions, suspension of development or marketing, or non-approval of product candidates. These sanctions could include a clinical hold on clinical trials, FDA’s refusal to approve pending applications or related supplements, withdrawal of or restrictions on an existing approval or licensure, untitled or warning letters, product recalls, product seizures, import detentions or export restrictions, total or partial suspension of production or distribution, injunctions, fines, restitution, disgorgement, civil penalties, or criminal prosecution. Such actions by government agencies could also require us to expend a large number of resources to respond to the actions. Any agency or judicial enforcement action could have a material adverse effect on us. We are not sure whether legislative changes will be enacted, or whether the FDA regulations, guidance, or interpretations will be changed, or what the impact of any such changes may be on the marketing approvals or licensures, or the prospects thereof, for our products.

 

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IND and Clinical Trials of Drug and Biological Products

 

Prior to commencing a human clinical trial of a drug or biological product, an IND application, which contains the results of preclinical studies and relevant clinical studies or other human experience along with other information, such as information about product chemistry, manufacturing, and controls and a proposed protocol, must be submitted to the FDA. An IND is a request for authorization from the FDA to administer an investigational drug or biological product to humans. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA within the 30-day period raises concerns or questions about the conduct of the clinical trial. In such a case, the IND sponsor must resolve any outstanding concerns with the FDA before the clinical trial may begin. A separate submission to the existing IND must be made for each successive clinical trial to be conducted during development of the drug or biologic.

 

An independent Institutional Review Board (“IRB”) must review and approve the investigational plan for the trial before it commences at each site. Informed written consent must be obtained from each trial subject.

 

Human clinical trials for drug and biological products typically are conducted in sequential phases that may overlap:

 

  Phase 1 - the investigational drug/biologic is given initially to healthy human subjects with the target disease or condition to determine metabolism and pharmacologic actions of the drug in humans, side effects and, if possible, to gain early evidence on effectiveness. During Phase 1 clinical trials, sufficient information about the investigational drug/biologic’s pharmacokinetics and pharmacologic effects may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical trials.
  Phase 2 - clinical trials are conducted to evaluate the effectiveness of the drug/biologic for a particular indication or in a limited number of trial subjects in the target population to identify possible adverse effects and safety risks, to determine the efficacy of the drug/biologic for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.
  Phase 3 - clinical trials are conducted in an expanded trial subject population to further evaluate dosage, effectiveness, and safety, to establish the overall benefit-risk relationship of the investigational drug/biologic, and to provide an adequate basis for product labeling and approval by the FDA. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of the drug or biologic in an expanded trial subject population at multiple clinical trial sites.

 

All clinical trials must be conducted in accordance with FDA regulations, including good clinical practice (“GCP”) requirements, which are intended to protect the rights, safety, and well-being of trial participants, define the roles of clinical trial sponsors, investigators, administrators, and monitors, and ensure clinical trial data integrity and reliability. Regulatory authorities, including the FDA, an IRB, a data safety monitoring board, or the sponsor, may suspend or terminate a clinical trial at any time on various grounds, including, among other reasons, a finding that the participants are being exposed to an unacceptable health risk or that the clinical trial is not being conducted in accordance with FDA requirements.

 

During the development of a new drug or biologic, sponsors are given opportunities to meet with the FDA at certain points. These points may be prior to submission of an IND, at the end of Phase 2 clinical trials, and before a New Drug Application (“NDA”) or BLA is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information about the data gathered to date, for the FDA to provide advice, and for the sponsor and the FDA to reach agreement on the next phase of development. Sponsors typically use the end-of-Phase 2 clinical trials meetings to discuss their Phase 2 clinical trials results and present their plans for the pivotal Phase 3 registration trial that they believe will support approval of the new drug/biologic.

 

Disclosure of Clinical Trial Information

 

Sponsors of certain clinical trials of FDA-regulated products, including drugs, biologics, and devices, are required to register and disclose certain clinical trial information on clinicaltrials.gov. Information related to the product, trial subject population, phase of investigation, study sites and investigators, and other aspects of the clinical trial, is made public as part of the registration. Sponsors also are obligated to disclose the results of their clinical trials, including the study protocol and statistical analysis plan, after completion. Disclosure of the clinical trial results can be delayed until the new product or new indication being studied has been approved, as long as approval occurs within a certain timeframe. Competitors may use this publicly available information to gain knowledge regarding our development programs.

 

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The BLA Approval Process

 

SkinTE is an autologous product, meaning it is derived from the cells and tissues of the individual to be treated with the product. The Company’s current plan is not to market SkinTE in the U.S. until it is licensed by the FDA through the BLA approval process. The process required by the FDA to obtain licensure generally involves the following:

 

  completion of non-clinical laboratory tests, animal studies and formulation studies conducted according to good laboratory practice or other applicable regulations;
  submission of an IND application;
  performance of adequate and well-controlled human clinical trials to establish the safety, purity, and potency of the proposed biologic for its intended use or uses conducted in accordance with GCP;
  submission to the FDA of a BLA after completion of Phase 3 pivotal clinical trials;
  FDA pre-license inspection of manufacturing facilities and audit of clinical trial sites; and
  FDA approval of a BLA.

 

The FDA has 60 days from its receipt of a BLA to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in- depth review. The FDA has agreed to certain performance goals in the review of BLAs. Most applications for standard review BLA products are reviewed within ten months of submission, and most applications for priority review BLA products are reviewed within six months of submission. The review process may be extended by the FDA for three additional months to consider certain late-submitted information, or information intended to clarify information already provided in the submission. Even if such additional information is submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval.

 

The FDA may also refer applications for novel BLA products or products that present difficult questions of safety, purity, or potency, to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations.

 

Before approving a BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. The FDA may also inspect preclinical study sites to verify compliance with Good Laboratory Practice (“GLP”) requirements prior to approval. Additionally, the FDA will inspect the facility or the facilities at which the BLA product is manufactured. The FDA will not approve the BLA unless compliance with cGMP requirements is satisfactory, and the BLA contains data that provide substantial evidence that the product is safe, pure, and potent for the indication studied.

 

After the FDA evaluates the BLA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete response letter outlines the deficiencies in the submission and may require substantial additional testing, including additional large-scale clinical testing or other information in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.

 

The cost of preparing and submitting a BLA is substantial. Furthermore, each BLA submission requires a user fee payment (approximately $3.1 million in fiscal year 2022), unless a waiver or exemption applies. Waiver of the fee may be sought on several grounds, including that the applicant is a small business submitting its first human drug application to the FDA for review, but there is no assurance we will qualify or receive a waiver if and when we file a BLA in the future. The manufacturer or sponsor of an approved BLA is also subject to annual establishment fees.

 

An approval letter authorizes commercial marketing and distribution of the licensed product with specific prescribing information for specific indications. As a condition of BLA approval, the FDA may require substantial post-approval testing and surveillance to monitor the product’s safety, purity, and potency and may impose other conditions, including post-market studies, labeling restrictions, or other risk evaluation and mitigation strategies, which can materially affect the product’s potential market and profitability. Once granted, product approvals may be withdrawn if compliance with regulatory standards is not maintained, or problems or safety issues are identified following initial marketing.

 

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Changes to some of the conditions established in an approved application, including changes in indications, labeling, device components, or manufacturing processes or facilities, require submission and FDA approval of a new BLA or BLA supplement before the change can be implemented. A BLA supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing BLA supplements as it does in reviewing BLAs.

 

Biosimilar Exclusivity

 

The Biologics Price Competition and Innovation Act of 2009 (BPCIA) creates an abbreviated approval pathway for biosimilar products. A biosimilar is a biological product that is highly similar to, and has no clinically meaningful differences from, an existing FDA-licensed reference product. Biosimilarity must be shown through analytical studies, animal studies, and at least one clinical study, absent a waiver. A biosimilar product may be deemed interchangeable with a prior licensed product if it is biosimilar and meets additional requirements under the BPCIA, including that it can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. Where permitted by state law, an interchangeable product may be substituted for the reference product without the involvement of the prescriber.

 

A reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product, and no application for a biosimilar may be submitted for four years from the date of licensure of the reference product. The first biologic product submitted under the abbreviated approval pathway that is determined to be interchangeable with the reference product may obtain exclusivity against a finding of interchangeability for other biosimilars for the same condition or use for the lesser of (i) one year after the first commercial marketing of the first interchangeable biosimilar; (ii) eighteen months after the first interchangeable biosimilar is approved if there is no patent challenge; (iii) eighteen months after resolution of a lawsuit over the patents of the reference biologic in favor of the first interchangeable biosimilar applicant; or (iv) 42 months after the first interchangeable biosimilar’s application has been approved if a patent lawsuit is ongoing within the 42-month period.

 

Post-Marketing Requirements for FDA Regulated Products

 

Following licensure of a new product, the company and the licensed products are subject to continuing regulation by the FDA, state, and foreign regulatory authorities including, among other things, monitoring and record-keeping activities, reporting adverse experiences to the applicable regulatory authorities, providing regulatory authorities with updated safety and efficacy information, manufacturing products in accordance with cGMP requirements, product sampling and distribution requirements, and complying with promotion and advertising requirements, which include, among others, standards for direct-to-consumer advertising and restrictions on promoting products for uses or in patient populations that are not consistent with the product’s approved labeling (known as “off-label use”), limitations on industry-sponsored scientific and educational activities, and requirements for promotional activities involving the internet, including social media. Although physicians may prescribe products for off-label uses, manufacturers may not market or promote such off-label uses. Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject to the approval of the FDA and other regulators, who may or may not grant approval, or may engage in a lengthy review process.

 

The FDA, state, and foreign regulatory authorities have broad enforcement powers. Failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, state, or foreign regulatory authorities, which may include the following:

 

  untitled letters or warning letters;
  fines, disgorgement, restitution, or civil penalties;
  injunctions (e.g., total or partial suspension of production) or consent decrees;
  product recalls, administrative detention, or seizure;
  customer notifications or repair, replacement, or refunds;
  operating restrictions or partial suspension or total shutdown of production;
  delays in or refusal to grant requests for future product licenses or approvals or foreign regulatory approvals of new products, new intended uses, or modifications to existing products;

 

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  withdrawals or suspensions of FDA product licenses or marketing approvals or foreign regulatory approvals, resulting in prohibitions on product sales;
  clinical holds on clinical trials;
  FDA refusal to review pending or new applications in the event of issues concerning the integrity or reliability of supporting data;
  FDA refusal to issue certificates to foreign governments needed to export products for sale in other countries; and
  criminal prosecution.

 

Any of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on our reputation, business, financial condition, and results of operations. Such actions by government agencies could also require us to expend a large amount of managerial and financial resources to respond to the actions. Any agency or judicial enforcement action could have a material adverse effect on us.

 

In the U.S., after a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA regulations require that products be manufactured in registered facilities and in accordance with cGMP. We have a facility for the production of clinical and commercial quantities of SkinTE. Effectuating compliance to cGMP requirements is currently underway. cGMP regulations require, among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the obligation to investigate and correct deviations from cGMP. For human cellular or tissue-based products like ours, cGMP also includes current good tissue practices to prevent the transmission of communicable diseases. These regulations also impose certain organizational, procedural, and documentation requirements with respect to manufacturing and quality assurance activities. Manufacturers and other entities involved in the manufacture and distribution of approved drugs, biologics, and medical devices are required to register their establishments with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and state agencies for compliance with cGMP and other laws. Accordingly, as a manufacturer we must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.

 

If in the future we elect to use a contract manufacturer, we will be responsible for the selection and monitoring of qualified firms and, in certain circumstances, suppliers to these firms. These firms and, where applicable, their suppliers are subject to inspections by the FDA at any time, and the discovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions that can interrupt the operation of any such firm or result in restrictions on product supply, including, among other things, recall or withdrawal of the product from the market.

 

Newly discovered or developed data on safety, purity, or potency may require changes to a product’s approved labeling, including the addition of new warnings and contraindications, and may require the implementation of other risk management measures.

 

Reimbursement, Anti-Kickback and False Claims Laws, and Other Regulatory Matters

 

In the U.S., the research, manufacturing, distribution, sale, and promotion of drug and biological products are potentially subject to regulation by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services (“CMS”), other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the Drug Enforcement Administration, the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental Protection Agency, state Attorneys General, and other state and local government agencies. For example, sales, marketing, and scientific/educational grant programs must comply, when applicable, with the federal Anti-Kickback Statute, the federal False Claims Act, the privacy regulations promulgated under HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All these activities are also potentially subject to federal and state consumer protection and unfair competition laws.

 

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The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) established the Medicare Part D program to provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription drug plans offered by private entities that will provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive regulatory approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-government payors.

 

The American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency for Healthcare Research and Quality, and the National Institutes for Health, and periodic reports on the status of the research and related expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage policies for public or private payors, it is not clear what effect, if any, the research will have on the sale of SkinTE in the future. It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect the sale of our product. If third-party payors do not consider SkinTE to be cost-effective compared to other available therapies, they may not cover our product after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our product on a profitable basis.

 

In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug and biologics pricing vary widely from country to country. For example, the European Union provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for our product. Historically, products launched in the European Union do not follow price structures of the U.S. and generally tend to be priced significantly lower than in the U.S.

 

In the U.S. we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,” including, but not limited to, the federal Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and regulations. The federal Anti-Kickback Statute makes it illegal for any person, or a party acting on its behalf, to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug, or other good or service for which payment in whole or in part may be made under a federal healthcare program, such as Medicare or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties, and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws similar to the federal Anti-Kickback Statute. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed by any insurer, not just federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal and state anti-kickback laws, the absence of guidance in the form of regulations or court decisions and the potential for additional legal or regulatory change in this area, it is possible that PolarityTE’s future sales and marketing practices or its future relationships with medical professionals might be challenged under fraud and abuse laws, which could harm PolarityTE.

 

The federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including Medicare and Medicaid) claims for items or services, including drugs and biologics, that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. Although we would not submit claims directly to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition, our future activities relating to the reporting of estimated prices for SkinTE, the reporting of prices used to calculate Medicaid rebate information, and other information affecting federal, state, and third-party reimbursement for our product, and the sale and marketing of SkinTE, are subject to scrutiny under this law. Penalties for a federal False Claims Act violation include three times the actual damages sustained by the government, plus mandatory civil penalties of between $12,537 and $25,076 for each separate false claim, and the potential for exclusion from participation in federal healthcare programs. Although the federal False Claims Act is a civil statute, conduct resulting in a federal False Claims Act violation may also implicate various federal criminal statutes. If the government were to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial fine. In addition, private individuals have the ability to bring actions under the federal False Claims Act and certain states have enacted laws modeled after the federal False Claims Act.

 

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There are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, as discussed below, a similar federal requirement requires manufacturers to track and report to the federal government certain payments made to physicians and teaching hospitals in the previous calendar year. These laws may affect our sales, marketing, and other promotional activities by imposing administrative and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state, and some federal, authorities.

 

The failure to comply with regulatory requirements exposes companies to possible legal or regulatory action. Depending on the circumstances, failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a company to enter into supply contracts, including government contracts.

 

Changes in regulations, statutes, or the interpretation of existing regulations could impact our business in the future by requiring, for example: (i) changes to our manufacturing facility; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of our product; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the operation of our business.

 

Patient Protection and Affordable Care Act

 

In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively the PPACA, was enacted, which includes measures that have or will significantly change the way healthcare is financed by both governmental and private insurers. Among the provisions of the PPACA of greatest importance to the drug industry are the following:

 

  The Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the manufacturer’s covered outpatient drugs furnished to Medicaid patients. Effective in 2010, the PPACA made several changes to the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum basic Medicaid rebate on most branded prescription drugs and biologic agents to 23.1% of the Average Manufacturer Price (“AMP”) and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations) of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory definition of AMP. The PPACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical manufacturers to pay rebates on Medicaid managed care utilization and by expanding the population potentially eligible for Medicaid drug benefits. The CMS have proposed to expand Medicaid rebate liability to the territories of the U.S. as well. In addition, the PPACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program. The implementation of this requirement by the CMS may also provide for the public availability of pharmacy acquisition of cost data, which could negatively impact our sales.
  In order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported by the manufacturer. The PPACA expanded the types of entities eligible to receive discounted 340B pricing, although, under the current state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is determined based on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the required 340B discount to increase.

 

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  The PPACA imposes a requirement on manufacturers of branded drugs and biologic agents to provide a 50% discount off the negotiated price of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., “donut hole”).
  The PPACA imposes an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs, although this fee would not apply to sales of certain products approved exclusively for orphan indications.
  The PPACA requires pharmaceutical manufacturers to track certain financial arrangements with physicians and teaching hospitals, including any “transfer of value” made or distributed to such entities, as well as any investment interests held by physicians and their immediate family members. Manufacturers are required to track this information and were required to make their first reports in March 2014. The information reported is publicly available on a searchable website.
  As of 2010, a new Patient-Centered Outcomes Research Institute was established pursuant to the PPACA to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products.

 

There have been prior public announcements by members of the federal government regarding their plans to repeal and replace the PPACA and Medicare. For example, the Tax Cuts and Jobs Act of 2017 eliminated the individual mandate requiring most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. We are not sure whether additional legislative changes will be enacted and are unable to predict what impact changes in the law may have on the pricing and distribution of our product.

 

Employees

 

We had approximately 42 full-time employees and two part-time employees as of December 31, 2022, all of whom are in the U.S. None of our employees are represented by a labor union or covered by a collective bargaining agreement.

 

Corporate History

 

The Parent Company – PolarityTE, Inc.

 

Majesco Entertainment Company, a Delaware corporation (“Majesco DE”), was incorporated in the state of Delaware on May 8, 1998. On December 1, 2016, Majesco Acquisition Corp., a Nevada corporation and wholly owned subsidiary of Majesco DE, entered into an Agreement and Plan of Reorganization with PolarityTE, Inc., a Nevada corporation (“PolarityTE NV”) and the sole stockholder of PolarityTE NV. The asset acquisition was subject to stockholder approval, which was received on March 10, 2017, and the transaction closed on April 7, 2017. In January 2017, Majesco DE changed its name to “PolarityTE, Inc.” (“PolarityTE”). Majesco Acquisition Corp. was then merged with PolarityTE NV, which remains a subsidiary of PolarityTE. Majesco Acquisition Corp. II, formed in November 2016 under Majesco Entertainment Company, changed its name to “PolarityTE MD, Inc.,” and remains a wholly owned subsidiary of PolarityTE.

 

Contract Research Services

 

At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business, which we operated through our indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”). Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is our direct subsidiary and held all the outstanding capital stock of IBEX (the “IBEX Shares”). Utah CRO also held all the member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”), which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business. The aggregate purchase price for the business was $3.8 million, of which $2.3 million was paid at closing and the balance satisfied by a promissory note payable to the seller with an initial fair value of $1.22 million and contingent consideration with an initial fair value of approximately $0.3 million.

 

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On April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (the “Buyer”), pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to the Buyer in exchange for an unsecured promissory note in the principal amount of $400,000 bearing simple interest at the rate of 10% per annum payable interest only on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares to the Buyer. Furthermore, on April 14, 2022, IBEX Property entered into that certain Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”) with another unrelated third party (the “Purchaser”) pursuant to which IBEX Property agreed to sell to the Purchaser the Property at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and Purchaser are affiliates due to common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions contemplated thereby and on April 29, 2022, we received the promissory note described above in the principal amount of $0.4 million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under the Real Estate Agreement. We recognized an insignificant net gain on sale of the IBEX Shares and IBEX Property and as a result of the transaction we were no longer engaged in any revenue generating business activity.

 

Our subsidiary, Arches Research, Inc. (“Arches”), offered prior to 2022 research services to third parties consisting of experimental planning, histology, and in vivo and in vitro imaging, including micro-ct. There was a substantial surge in COVID-19 testing throughout the United States as a result of the COVID-19 pandemic, which began in the spring of 2020. In 2020 and 2021, Arches had equipment and staff capable of performing polymerase chain reaction testing for COVID-19. Arches had the opportunity to use its research facilities to offer laboratory testing services for COVID-19, and to that end registered under the Clinical Laboratory Improvement Amendments (“CLIA”) in May 2020, and it began providing COVID-19 testing services on May 27, 2020. Arches’ primary customer for testing services was an organization controlling multiple long-term care and laboratory facilities in New York State and surrounding areas. Beginning in April 2021 there was a significant loss of COVID-19 testing revenues due to the loss of Arches’ major testing customer in the first quarter of 2021. Subsequent efforts to find new business to replace the lost testing business were not successful and we made the decision to cease COVID-19 testing in August 2021. At the same time, Arches ceased offering research services to outside third parties.

 

Contact and Available Information

 

Our principal executive offices are located at 1960 S. 4250 West, Salt Lake City, UT 84104, and our telephone number is (800) 560-3983.

 

We file annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (“SEC”). Our SEC filings are available to the public at the SEC’s website at www.sec.gov. We also maintain a website located at www.polarityte.com, where these SEC filings and other information about us can be accessed, free of charge, as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.

 

Item 1A. Risk Factors.

 

Our business and operations are subject to many risks and uncertainties as described below. However, the risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial, may become important factors that could harm our business, financial condition, or results of operations. If any of the following risks should occur in the future, our financial condition or results of operations could suffer.

 

Risks Related to Our Financial Condition

 

We will need additional funding to pursue the regulatory process for SkinTE and sustain our operations, and we may be unable to raise capital when needed, which would force us to delay, reduce, eliminate, or abandon our product development program.

 

We reported an operating loss of $22.4 million for the year ended December 31, 2022, and on that date we had an accumulated deficit of $516.2 million. We believe our cash and cash equivalents at December 31, 2022, will fund our current business plan including related operating expenses and capital expenditure requirements through the end of the second calendar quarter of 2023. Accordingly, there is substantial doubt about our ability to continue as a going concern beyond that time unless we can raise additional capital from external sources.

 

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We expect to incur significant operating costs in the near term as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe due to unforeseen expenses, difficulties, complications, delays, and other unknown events. As a result of the disposition of IBEX in April 2022, we are no longer engaged in any revenue generating activity that would contribute to defraying our operating costs in future periods, which will make us entirely dependent on capital obtained from external sources to fund our operations. The impact of pandemics, inflation, armed conflicts overseas, and other macroeconomic issues have and may continue to adversely affect capital markets and could limit our ability to obtain the capital we need to operate our business.

 

We may not be able to obtain necessary capital in sufficient amounts, on terms favorable to us, or at all. If adequate funds are not available for our business in the future, we may be required to delay, reduce the scope of, or eliminate the plans for obtaining regulatory licensure or approval for SkinTE or be unable to continue operations over a longer term, any of which would have a material adverse effect on our business, financial condition, results of operation, and prospects.

 

Our wholly owned subsidiary accepted a loan under the CARES Act pursuant to the Paycheck Protection Program (“PPP”), and the loan may subject us to challenges, audits, or investigations regarding qualification for the loan, any of which could reduce our liquidity and have a material adverse effect on our business, financial condition, and results of operations.

 

On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “PTE-MD”) entered into a promissory note offered by a bank (the “Lender”) evidencing an unsecured loan in the amount of $3,576,145 made to PTE-MD under the PPP (the “Loan”). On October 15, 2020, PTE-MD applied to the Lender for forgiveness of the PPP Loan in its entirety (as provided for in the CARES Act) based on PTE-MD’s use of the PPP Loan for payroll costs, rent, and utilities. On October 26, 2020, PTE-MD was advised that the Lender approved the application, and that the Lender was submitting the application to the Small Business Administration (“SBA”) for a final decision. The SBA subsequently approved PTE-MD’s application for forgiveness of the PPP Loan, and the principal and interest of $3,612,376 was fully paid by the SBA on June 12, 2021.

 

Pursuant to the requirements under the CARES Act, in connection with the PPP Loan PTE-MD certified that current economic uncertainty made the Loan request necessary to support the ongoing operations of PTE-MD. We believe that certification was made in a manner consistent with SBA guidance that borrowers must make the certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. In connection with PTE-MD’s application for forgiveness of the PPP Loan, it provided information on the use of the PPP Loan proceeds for payroll costs, rent, and utilities, which are permitted uses to qualify for forgiveness of the loan.

 

Under the CARES Act, the SBA may review any PPP loan of any size at any time at its discretion. On September 17, 2021, PTE-MD received notice from the Lender that the SBA is continuing to review the PPP Loan. As part of this review, the SBA requested that PTE-MD provide documents that it is required to maintain but may not have been required to submit with its application for the PPP Loan. These documents included an affiliation worksheet showing the relationship between PolarityTE and PTE-MD and affiliated subsidiaries, documents showing the use of the PPP Loan proceeds, documents showing PTE-MD’s calculation of the loan amount it requested in its loan application, its federal tax returns, and documents showing employee compensation information. PTE-MD submitted the documents to the SBA through the Lender on September 28, 2021.

 

There is no assurance the SBA could not in the future make an adverse finding with respect to our qualification for the Loan or the validity of the certifications we made in connection with the PPP Loan and its forgiveness. If an adverse finding arises, PTE-MD could be required to return the full amount of the Loan, which would reduce its liquidity, and could subject it to fines and penalties, and exclusion from government contracts. In particular, PTE-MD may become subject to actions under the FCA, including its qui tam provisions, which, among other things, prohibits persons from knowingly filing, or knowingly causing to be filed, a false statement, or knowingly using a false statement, to obtain payment from the federal government. Violations of the FCA are subject to treble damages and penalties. In the case of an SBA loan, the government could allege that single damages are the amount of the loan and interest thereon (or more), which under the FCA could then be trebled. Substantial penalties must also be imposed for each submitted false statement when a defendant loses an FCA trial. FCA cases may be initiated by the U.S. Department of Justice or by private persons or entities, often called “whistleblowers,” who bring the action on behalf of the U.S. PTE-MD may also face enforcement arising under other federal statutes, including criminal laws, and administrative actions and investigations initiated by SBA or other governmental entities. Furthermore, if PTE-MD is identified as an entity that the media, government officials, or others seek to portray as a business that should not have availed itself of PPP funding, PTE-MD may face negative publicity, which could have a materially adverse impact on its business and operations and on PolarityTE’s business and operations as its parent. Generally, the cost of defending claims under the FCA, regardless of merit, could be substantial, even as much as the PPP loan proceeds.

 

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Risks Related to our Research & Development, Clinical, and Commercialization Activities

 

Our product is subject to extensive regulation by the FDA or comparable foreign regulatory authorities, which can be costly and time consuming, cause unanticipated delays or prevent the receipt of the required licensures and approvals to commercialize our product.

 

The preclinical and clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing, and distribution of SkinTE is subject to extensive regulation by the FDA and other U.S. regulatory agencies, or comparable authorities in foreign markets. In the U.S., we are not permitted, directly or through others, to market our product until the FDA approves a BLA for SkinTE and licenses the product. Similar approval is required in foreign jurisdictions. The process of obtaining these approvals is uncertain, dependent on future clinical trial results, expensive, often takes many years, and can vary substantially based upon the type, complexity, and novelty of the product candidate involved. Approval policies or regulations may change and may be influenced by the results of other similar or competitive products, making it more difficult for us to achieve such approval in a timely manner or at all. Any guidance that may result from FDA advisory committee discussions may make it more difficult or expensive to develop and commercialize SkinTE. In addition, as a company, we have not previously filed a BLA with the FDA or filed a similar application with other foreign regulatory agencies. This lack of experience may impede our ability to obtain FDA or other foreign regulatory agency licensure or approval in a timely manner, if at all, for our product.

 

Despite the time and expense invested, regulatory approval is never guaranteed. The FDA or comparable foreign authorities can delay, limit, or deny approval or licensure of a product candidate for many reasons, including:

 

  a product candidate for a BLA may not be deemed safe, pure, and potent;
  agency officials of the FDA or comparable foreign regulatory authorities may not find the data from non-clinical or preclinical studies and clinical trials generated during development to be sufficient;
  the FDA or comparable foreign regulatory authorities may not approve manufacturing processes or may determine that the manufacturing facilities are not compliant with cGMP; or
  the FDA or a comparable foreign regulatory authority may change its approval policies or adopt new regulations.

 

Our inability to obtain these approvals would prevent us from commercializing our product.

 

The FDA regulatory approval process is lengthy and time-consuming, and we could experience significant delays or other challenges in the clinical development and regulatory licensures or approval of its product.

 

We may experience delays or other challenges in commencing and completing clinical trials for SkinTE that would be necessary for product licensure or approval. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll trial subjects on time or in sufficient numbers, or be completed on schedule, if at all. Any of our future clinical trials may be delayed or precluded for a variety of reasons, including issues related to:

 

  the availability of financial resources for commencing and completing planned clinical trials;
  reaching agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and clinical trial sites;
  obtaining and maintaining approval of each reviewing institutional review board (“IRB”);

 

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  obtaining and maintaining regulatory approval for clinical trials in each country;
  recruiting sufficient numbers of suitable trial subjects to participate in clinical trials;
  competing priorities at clinical trial sites or departures of study investigators or personnel;
  having trial subjects complete a clinical trial or return for post-treatment follow-up;
  clinical trial sites deviating from trial protocol or dropping out of a trial;
  adding new clinical trial sites;
  developing one or more new formulations or routes of administration; or
  manufacturing sufficient quantities of our product candidate for use in clinical trials.

 

Trial subject enrollment, a significant factor in the timing and success of clinical trials, is affected by many factors including the size and nature of the trial subject population, the proximity of trial subjects to clinical sites, the eligibility criteria for the clinical trial, the potential impact of COVID-19 or other pandemic, the design of the clinical trial, competing clinical trials and clinicians, and trial subjects’ perceptions as to the potential advantages of the product candidate being studied in relation to other available therapies, including any therapies that may be approved for the indications we are investigating. In addition, significant numbers of trial subjects who enroll in our clinical trials may drop out during the clinical trials for various reasons. We endeavor to account for dropout rates in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are correct, or that trials will not experience higher numbers of dropouts than anticipated, which would result in the delay of completion of such trials beyond our expected timelines, if at all.

 

We could encounter delays if physicians encounter unresolved ethical issues associated with enrolling trial subjects in clinical trials of our product candidate in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical trial may be delayed, suspended, or terminated by us, any reviewing IRB, the institutions in which such trial is conducted, the data monitoring committee for such trial, or by the FDA or other regulatory authorities due to a number of factors, including inadequate protocols or other information supporting an IND, failure to conduct the clinical trial in accordance with regulatory requirements, GCP, or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product candidate, changes in governmental regulations, or administrative actions or lack of adequate funding to continue the clinical trial. Furthermore, many of the factors that cause, or lead to, a termination or delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory licensure or approval of a product. In connection with clinical trials, we face additional risks that:

 

  there may be slower than expected rates of trial subject recruitment and enrollment;
  trial subjects may fail to complete the clinical trials;
  there may be an inability or unwillingness of trial subjects or medical investigators to follow our clinical trial protocols;
  there may be an inability to monitor trial subjects adequately during or after treatment;
  conditions of trial subjects may deteriorate rapidly or unexpectedly, which may cause the trial subjects to become ineligible for a clinical trial or may prevent our product from demonstrating the regulatory standard of safety, purity, and potency;
  trial subjects may die or suffer other adverse effects for reasons that may or may not be related to our product being tested;
  we may not be able to sufficiently standardize certain of the tests and procedures that are part of our clinical trials because such tests and procedures are highly specialized and involve a high degree of expertise;
  the clinical trials may not be able to commence, or to proceed, because of problems with compliance with cGMP at the manufacturing facilities;
  a product candidate may not prove to be efficacious in all or some trial subject populations;
  the results of the clinical trials may not confirm the results of earlier trials;
  the results of the clinical trials may not meet the level of statistical significance required by the FDA or other regulatory agencies;
  there may be data discrepancies or documentation issues in the clinical trials that raise questions about data integrity or reliability; and
  a product candidate may not have a favorable risk/benefit assessment in the disease areas studied.

 

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We cannot assure you that any future clinical trial for our product will be started or completed successfully, on schedule, or at all. If we experience suspension or termination of, or delays in the completion of, any clinical trial for our product, the commercial prospects for the product will be harmed, and our ability to generate product revenues will be delayed or diminished. In addition, any delays in initiating or completing our clinical trials will increase our costs, slow down our product development and approval process, and jeopardize our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, prospects, financial condition, and results of operations significantly.

 

Changes in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel, or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact our business.

 

The ability of the FDA to review and approve or license new products can be affected by a variety of factors, including (i) government budget and funding levels, as well as government shutdowns, (ii) the ability to hire and retain key personnel and accept the payment of user fees, and (iii) statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

 

Disruptions at the FDA and other agencies may also slow the time necessary for new products to be reviewed or licensed or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory submissions, which could have a material adverse effect on our business. Additionally, over the last several years, the COVID-19 pandemic has caused unexpected increases in the FDA’s workload and has degraded the timeliness of many agency activities, including pre-submission interactions, product reviews, and pre-license inspections.

 

Even if we obtain and maintain regulatory licensure or approval for our product in one jurisdiction, we may never obtain regulatory licensure or approval for the product in any other jurisdiction, which would limit our market opportunities and adversely affect our business.

 

Obtaining and maintaining regulatory licensure or approval for our product in one jurisdiction does not guarantee that we will be able to obtain or maintain regulatory licensure or approval in other jurisdictions. For example, even if the FDA grants marketing approval for SkinTE, comparable regulatory authorities in foreign countries must also approve the manufacturing, marketing, and promotion of the product in those countries. Approval procedures vary amongst jurisdictions and can involve requirements and administrative review periods different from, and greater than, those in the U.S., including additional preclinical studies or clinical trials. Obtaining foreign regulatory approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for us and could delay or prevent the introduction of our product in certain countries. In many countries outside the U.S., a product candidate must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge for our product is also subject to approval. If we fail to comply with the regulatory requirements in international markets or fail to receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our product will be harmed, which would adversely affect our business, prospects, financial condition, and results of operations.

 

Even if our product candidate receives regulatory licensure or approval, our product candidate may still face future development and regulatory difficulties.

 

If our product receives regulatory approval, the FDA or comparable foreign regulatory authorities may still impose significant restrictions on the indicated uses or marketing of the product or impose ongoing requirements for potentially costly post-approval studies and trials or other risk mitigation measures. In addition, regulatory agencies subject a product, its manufacturer, and the manufacturer’s facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product, including adverse events of unanticipated nature, severity, or frequency, or problems with the facility where the product is manufactured, stored, tested, or released, a regulatory agency may impose restrictions on that product or PolarityTE, including narrowing product indications, requiring labeled warnings, or requiring withdrawal of the product from the market. Our product candidate will also be subject to ongoing FDA or comparable foreign regulatory authorities’ requirements for labeling, packaging, storage, advertising, promotion, record-keeping, import, export, clinical trial registration and results disclosure for post-market as well as pre-market trials, and submission of safety and other post-market information. If our product fails to comply with applicable regulatory requirements, a regulatory agency may:

 

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  issue warning letters or other notices of possible violations;
  impose civil or criminal penalties or fines or seek disgorgement of revenue or profits;
  suspend or terminate any ongoing clinical trials;
  refuse to approve pending applications or supplements to approved applications filed by us or our licensees;
  withdraw any regulatory licensures or approvals;
  impose restrictions on operations, including costly new manufacturing requirements, or shut down our manufacturing operations; or
  seize or detain product or require a product recall.

 

The FDA and comparable foreign authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses and other unlawful promotion.

 

The FDA and comparable foreign authorities strictly regulate the promotional claims that may be made about products, such as SkinTE, if licensed or approved. In particular, a product may not be promoted for uses that are not approved by the FDA or comparable foreign authorities as reflected in the product’s approved labeling and may not be promoted with claims that are false, misleading, or inadequately substantiated. If we receive marketing approval for our product for its proposed indications, physicians may nevertheless use our product for their patients in a manner that is inconsistent with the approved label, if the physicians believe in their professional medical judgment that our product could be used in such manner.

 

However, if we are found to have promoted our product for any off-label uses, or with claims that are false, misleading, or not adequately substantiated, the federal government could levy civil, criminal, or administrative penalties, and seek to impose fines on us. Such enforcement has become more common in the industry. The FDA or comparable foreign authorities could also request that we enter into a consent decree or a corporate integrity agreement or seek a permanent injunction against us under which specified promotional conduct is monitored, changed, or curtailed. If we cannot successfully manage the promotion of our product, if licensed or approved, we could become subject to significant liability, which would materially adversely affect our business, financial condition, and results of operations.

 

We, and any contract manufacturer we may engage in the future, are subject to significant regulation with respect to manufacturing our product. Even once cGMP compliance is initially achieved, the manufacturing facility on which we rely may not continue to meet regulatory requirements.

 

Entities involved in the preparation of products subject to BLA approval for clinical trials or commercial sale, including us and any contract manufacturer we may engage in the future, are subject to extensive regulation. Products sold commercially after BLA approval or used in clinical trials must be manufactured in accordance with cGMP. cGMP laws and regulations govern manufacturing facilities, processes, and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Poor control of production processes or facilities can lead to the introduction of contaminants or to inadvertent changes in the properties or stability of our product candidate that may not be detectable in final product testing. We, or our contract manufacturers, must supply all necessary documentation on a timely basis in support of a BLA or a change in manufacturing site after a BLA is issued on a timely basis and must adhere to cGMP statutory requirements and regulations enforced by the FDA or comparable foreign authorities through their facilities inspection program. The facilities and quality systems of our facility where we will manufacture SkinTE must pass a pre-license inspection for compliance with the applicable statutory and regulatory requirements as a condition of regulatory licensure or approval of our product. In addition, the regulatory authorities may, at any time, with or without cause, audit, inspect, or conduct a remote review of records or information about a manufacturing facility involved with the preparation of our product or the associated quality systems for compliance with the statute or regulations applicable to the activities being conducted. If our facility does not pass a pre-license plant inspection, regulatory licensure or approval of our product may not be granted or may be substantially delayed until any deficiencies are corrected to the satisfaction of the regulatory authority, if ever. If we engage contract manufacturers in the future, we intend to oversee the contract manufacturers, but we cannot control the manufacturing process and will be completely dependent on our contract manufacturing partners for compliance with the regulatory requirements.

 

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The regulatory authorities also may, at any time following approval of a product for sale, audit, inspect, or remotely review records regarding our facility or the manufacturing facilities of our third-party contractors. If any such inspection, audit, or review identifies a failure to comply with applicable statute or regulations or if a violation of our product specifications or applicable statute or regulations occurs independent of such an inspection, audit, or review, we or the relevant regulatory authority may require remedial measures that may be costly or time consuming for us or a third party to implement, and may include the temporary or permanent suspension of a clinical trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business, financial condition, and results of operations.

 

If we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or comparable foreign authorities can impose regulatory sanctions including, among other things, refusal to approve a pending application for a product candidate, withdrawal of an approval, or suspension of production. As a result, our business, financial condition, and results of operations may be materially and adversely affected.

 

Additionally, if supply from our facility or the facility of a future contract manufacturer is interrupted, an alternative manufacturer would need to be qualified through a BLA supplement, or equivalent foreign regulatory filing, which could result in further delay. The regulatory agencies may also require additional studies or trials if a new manufacturer is relied upon for commercial production. Switching manufacturing facilities may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.

 

These factors could cause us to incur higher costs and could cause the delay or termination of clinical trials, regulatory submissions, required approvals, or commercialization of our product. Furthermore, if our facility or future contract manufacturers fail to meet production requirements and we are unable to secure one or more replacement manufacturing facilities capable of production at a substantially equivalent cost or at all, our clinical trials may be delayed, or we could lose potential revenue.

 

If we fail to obtain and sustain an adequate level of reimbursement for our product by third-party payors, potential future sales would be materially adversely affected.

 

There will be no viable commercial market for our product, if approved, without reimbursement from third-party payors. Reimbursement policies may be affected by future healthcare reform measures. We cannot be certain that reimbursement will be available for our product. Additionally, even if there is a viable commercial market, if the level of reimbursement is below our expectations, our anticipated revenue and gross margins will be adversely affected. Third-party payors, such as government or private healthcare insurers, carefully review and increasingly question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan, and other factors. Reimbursement rates may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. There is a current trend in the U.S. healthcare industry toward cost containment.

 

Large public and private payors, managed care organizations, group purchasing organizations, and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications. Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If we are unable to show a significant benefit relative to existing therapies, Medicare, Medicaid, and private payors may not be willing to provide reimbursement for our product, which would significantly reduce the likelihood of our product gaining market acceptance.

 

We expect that private insurers will consider the efficacy, cost-effectiveness, safety, and tolerability of our product in determining whether to approve reimbursement and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business, financial condition, and results of operations would be materially adversely affected if we do not receive approval for reimbursement of our product from private insurers on a timely or satisfactory basis. Limitations on coverage could also be imposed at the local Medicare carrier level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not require participating prescription drug plans to cover all drugs within a class of products. Our business, financial condition, and results of operations could be materially adversely affected if Part D prescription drug plans were to limit access to, or deny or limit reimbursement of, our product.

 

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Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis. In many countries, the product cannot be commercially launched until reimbursement is approved. In some foreign markets, prescription drug pricing remains subject to continuing governmental control even after initial approval is granted. The negotiation process in some countries can be very long. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our products to other available therapies.

 

If the prices for our product are reduced or if governmental and other third-party payors do not provide adequate coverage and reimbursement of our product, our future revenue, cash flows, and prospects for profitability will suffer.

 

Current and future legislation may increase the difficulty and cost of commercializing our product and may affect the prices we may obtain if our product is approved for commercialization.

 

In the U.S. and some foreign jurisdictions, there have been a number of adopted and proposed legislative and regulatory changes regarding the healthcare system that could prevent or delay regulatory licensure or approval of our product, restrict or regulate post-marketing activities, and affect our ability to profitably sell our product.

 

In the U.S., the Medicare Modernization Act of 2003 (“MMA”) changed the way Medicare covers and pays for pharmaceutical products. Cost reduction initiatives and other provisions of this legislation could limit the coverage and reimbursement rate that we receive for our product. While the MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors.

 

The Patient Protection and Affordable Care Act (“PPACA”) was intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry, and impose additional health policy reforms. The PPACA increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both branded and generic drugs and revised the definition of Average Manufacturer Price, which may also increase the amount of Medicaid drug rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates and created an alternative rebate formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers for Medicare & Medicaid Services, which administer the Medicaid Drug Rebate Program, also proposed to expand Medicaid rebates to the utilization that occurs in the territories of the U.S., such as Puerto Rico and the Virgin Islands. Further, beginning in 2011, the PPACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred to as the “donut hole.” Legislative and regulatory proposals have been introduced at both the state and federal level to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.

 

There have been prior public announcements by members of the federal government regarding their plans to repeal and replace the PPACA and Medicare. For example, the Tax Cuts and Jobs Act of 2017 eliminated the individual mandate requiring most Americans (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance, or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing approval testing and other requirements.

 

We are subject to “fraud and abuse” and similar laws and regulations, and a failure to comply with such regulations or prevail in any adverse claim or proceeding related to noncompliance could harm our business, financial condition, and results of operations.

 

In the U.S., we are subject to various federal and state healthcare “fraud and abuse” laws, including anti-kickback laws, false claims laws, and other laws intended, among other things, to reduce fraud and abuse in federal and state healthcare programs. The federal Anti-Kickback Statute makes it illegal for any person, including a drug or biologics manufacturer, or a party acting on its behalf, to knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular drug or biologic, or other good or service, for which payment in whole or in part may be made under a federal healthcare program, such as Medicare or Medicaid. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute.

 

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The federal False Claims Act prohibits anyone from, among other things, knowingly presenting or causing to be presented for payment to the government, including the federal healthcare programs, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that were not provided as claimed, or claims for medically unnecessary items or services. Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact, or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services to obtain money or property of any healthcare benefit program. Violations of fraud and abuse laws may be punishable by criminal or civil sanctions, including penalties, fines, or exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid, and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.

 

Many states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not just governmental payors. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement, we could be subject to penalties.

 

Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that as we pursue our business we may be challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. If we are found in violation of one of these laws, we could be subject to significant civil, criminal, and administrative penalties, damages, fines, exclusion from governmental funded federal or state healthcare programs, and the curtailment or restructuring of our operations. If this occurs, our business, financial condition, and results of operations may be materially adversely affected.

 

If we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues, and liquidity may suffer, and our product, if approved for commercialization, could be subject to restrictions or withdrawal from the market.

 

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to generate revenues from our product, if approved. If regulatory sanctions are applied or if regulatory licensure or approval is not granted or is withdrawn, our business, financial condition, and results of operations will be adversely affected. Additionally, if we are unable to generate revenues from product sales, our potential for achieving profitability will be diminished and our need to raise capital to fund our operations will increase.

 

Risks Related to Intellectual Property

 

Our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which could have a material and adverse effect on us.

 

Our success depends significantly on our ability to protect our proprietary rights in technologies that presently consist of trade secrets, patents, and patent applications. We currently have four issued patents and one allowed patent application in the U.S. relating to our minimally polarized functional unit (“MPFU”) technology. We intend to continue our patenting activities and rely on patent protection, as well as a combination of copyright, trade secret, and trademark laws and nondisclosure, confidentiality, and other contractual restrictions to protect our proprietary technology, and there can be no assurance these methods of protection will be effective. These legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive benefit. The patent application process can be time consuming and expensive. We cannot ensure that any of the pending patent applications already filed or that may be filed or acquired will result in issued patents. Competitors may be able to design around our patents or develop procedures that provide outcomes that are comparable or even superior to ours. There is no assurance that the inventors of the patents and applications were the first-to-invent or the first-inventor-to-file on the inventions, or that a third party will not claim ownership in one of our patents or patent applications. We cannot assure you that a third party does not have or will not obtain patents that could preclude us from practicing the patents we own or license now or in the future.

 

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The failure to obtain and maintain patents or protect our intellectual property rights could have a material and adverse effect on our business, results of operations, and financial condition. We cannot be certain that, if challenged, any patents we have obtained or ultimately obtain would be upheld because a determination of the validity and enforceability of a patent involves complex issues of fact and law. If one or more of any patents we have obtained or ultimately obtain is invalidated or held unenforceable, such an outcome could reduce or eliminate any competitive benefit we might otherwise have had.

 

In the event a competitor infringes upon any patent we have obtained or ultimately obtain, or a third party including but not limited to a university or other research institution, makes a claim of ownership over our patents or other intellectual property rights, confirming, defending, or enforcing those rights may be costly, uncertain, difficult, and time consuming.

 

There can be no assurance that a third party, including, but not limited to, a university or other research institution that our founders were associated with in the past, will not make claims to ownership or other claims related to our technology.

 

There can be no assurance that a third party, including but not limited to, a university or other research institution that our founders were associated with in the past, will not make claims to ownership or other claims related to our technology. We believe we have developed our technology outside of any institutions, but we cannot guarantee such institutions would not assert a claim to the contrary. Even if successful, litigation to enforce or defend our intellectual property rights could be expensive and time consuming and could divert our management’s attention. Further, bringing litigation for patent enforcement subjects us to the potential for counterclaims. If one or more of our current or future patents is challenged in U.S. or foreign courts or the U.S. Patent and Trademark Office or foreign patent offices, the patent(s) may be found invalid or unenforceable, which could harm our competitive position. If any court or any patent office ultimately cancels or narrows the claims in any of our patents through any pre- or post-grant patent proceedings, such an outcome could prevent or hinder us from being able to enforce the patent against competitors. Such adverse decisions could negatively affect our future revenue and results of operations.

 

We may be subject to claims that our employees have wrongfully appropriated, used, or disclosed intellectual property of their former employers.

 

We employ individuals who were previously employed by other companies, universities, or academic institutions. We may be subject to claims that we or our employees have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a prior employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have an adverse impact on our business, financial condition, results of operations, and cash flows.

 

We may be subject to claims that former or current employees, collaborators, or other third parties have an interest in our patents, patent applications, or other intellectual property as an inventor or co-inventor. Litigation may be necessary to defend against any claims challenging inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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If we are unable to protect the confidentiality of our proprietary information and know-how related to SkinTE or any of our product candidates, our competitive position would be impaired and our business, financial condition, and results of operations could be adversely affected.

 

Some of our technology, including our knowledge regarding certain aspects of the manufacture of SkinTE and potential product candidates, is unpatented and is maintained by us as trade secrets. To protect these trade secrets, the information is restricted to our employees, consultants, collaborators, and advisors on a need-to-know basis. In addition, we require our employees, consultants, collaborators, and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, do not ensure protection against improper use or disclosure of confidential information, and these agreements may be breached. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements and other obligations of our employees to assign intellectual property to us may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators, or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

 

Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets could impair our competitive position and have a material adverse effect on our business, financial condition, and results of operations.

 

We may become subject to claims of infringement of the intellectual property rights of others, which could prohibit us from developing our product, require us to obtain licenses from third parties, require us to develop non-infringing alternatives, or subject us to substantial monetary damages.

 

Third parties could assert that our processes, SkinTE, product candidates, or technology infringe their patents or other intellectual property rights. Whether a process, product, or technology infringes a patent or other intellectual property involves complex legal and factual issues, the determination of which is often uncertain. We cannot be certain that we will not be found to have infringed the intellectual property rights of others. Because patent applications may remain unpublished for certain periods of time and may take years to be issued as patents, there may be applications now pending of which we are unaware or that do not currently contain claims of concern that may later result in issued patents that SkinTE, our product candidates, procedures, or processes will infringe. There may be existing patents that SkinTE, our product candidates, procedures, or processes infringe, of which infringement we are not aware. Third parties could also assert ownership over our intellectual property. Such an ownership claim could cause us to incur significant costs to litigate the ownership issues. If an ownership claim by a third party were upheld as valid, we may be unable to obtain a license from the third party on acceptable terms to continue to make, use, or sell technology free from claims by that third party of infringement of the third party’s intellectual property. We have not obtained, and do not have a present intention to obtain, any legal opinion regarding our freedom to practice our technology.

 

If we are unsuccessful in actions we bring against the patents of other parties, and it is determined that we infringe upon the patents of third parties, we may be subject to injunctions, or otherwise prevented from commercializing potential products or services in the relevant jurisdiction or may be required to obtain licenses to those patents or develop or obtain alternative technologies, any of which could harm our business. Furthermore, if such challenges to our patent rights are not resolved in our favor, we could be delayed or prevented from entering into new collaborations or from commercializing certain product candidates, which could adversely affect our business and results of operations.

 

We may not be able to protect our intellectual property in countries outside of the U.S.

 

Intellectual property law outside the U.S. is uncertain and, in many countries, is currently undergoing review and revisions. The laws of some countries do not protect patent and other intellectual property rights to the same extent as U.S. laws. Third parties may challenge our patents or applications in foreign countries by initiating pre- and post-grant oppositions or invalidation proceedings. Developments during opposition or invalidation proceedings in one country may directly or indirectly affect a corresponding patent or patent application in another country in an adverse manner. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents or our competitors’ patents that have been issued in countries other than the U.S. This could result in substantial costs, divert our efforts and attention from other aspects of our business, and could have a material adverse effect on our results of operations and financial condition.

 

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General Risks

 

We have one facility for the production of SkinTE for our clinical trials, so if this facility is destroyed or it experiences any manufacturing or laboratory difficulties, disruptions, or delays, this could adversely affect our ability to conduct our clinical trials.

 

Manufacturing of SkinTE takes place at our single U.S. facility. If regulatory, manufacturing, or other problems cause us to discontinue production operations at this facility, we would not be able to supply SkinTE for clinical trials, which would adversely impact our business. If this facility or the equipment in it is significantly damaged or destroyed by fire, flood, power loss, or similar events, we may not be able to replace our manufacturing capacity quickly or inexpensively, or at all. In the event of a temporary or protracted loss of this facility or equipment, we might not be able to quickly transfer manufacturing to a third party. Even if we could transfer manufacturing, the shift would likely be expensive and time-consuming, particularly since an alternative facility would need to comply with applicable FDA manufacturing and quality requirements and, if applicable, FDA approval would be required before any products manufactured at that facility could be used.

 

Our success depends on members of our senior management team and the loss of one or more key employees or an inability to attract and retain skilled employees will negatively affect our business, financial condition, and results of operations.

 

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical, and other personnel. We are highly dependent upon certain members of senior management and other key personnel. Although we have entered into employment agreements with our senior management, each of them may terminate employment with us at any time. The replacement of any of our key personnel likely would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and could, therefore, negatively affect our business, financial condition, and results of operations. We do not carry any key person insurance policies that could offset potential loss of service under applicable circumstances.

 

We have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we do. If we hire employees from competitors or other companies, their former employers may attempt to assert that these employees have or we have breached legal obligations, resulting in a diversion of our time and resources to disputes and litigation and, potentially, result in liability.

 

Job candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the perceived value of our stock awards decline, it may harm our ability to recruit and retain highly skilled employees.

 

A resurgence of COVID-19 or another pandemic in the future could materially affect our operations, as well as the business or operations of third parties with whom we conduct business.

 

The impact of a resurgence of COVID-19 or another pandemic in the future, including the impact of restrictions imposed to combat its spread, could result in businesses shutting down, work restrictions, and reduced capacity and access to healthcare facilities. Depending upon the length of COVID-19 surges or another pandemic and resulting work restrictions and limitations on healthcare facilities, our future clinical trials for SkinTE may be adversely affected by: (i) delays or difficulties in enrolling patients in our clinical trials approved under our IND; (ii) delays or difficulties in clinical site activation, including difficulties in recruiting clinical site investigators and clinical site personnel; (iii) delays in clinical sites receiving the supplies and materials needed to conduct the clinical trials, including interruption in shipping that may affect the transport of our clinical trial product; (iv) changes in local regulations as part of a response to a pandemic that may require us to change the ways in which our clinical trials are to be conducted, which may result in unexpected costs or discontinuance of the clinical trials altogether; (v) diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials; (vi) interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers, and others, or interruption of clinical trial subject visits and study procedures, the occurrence of which could affect the integrity or reliability of clinical trial data; (vii) risk that participants enrolled in our clinical trials will acquire COVID-19 or other pandemic disease while clinical trials are ongoing, which could impact the results of the clinical trials, including by increasing the number of observed adverse events; (viii) risk that clinical trial investigators or other site staff will acquire COVID-19 or other pandemic disease while the clinical trial is ongoing, which could impede the conduct or progress of the clinical trials; (ix) delays in necessary interactions with local regulators, ethics committees, and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees; (x) limitations in employee resources that would otherwise be focused on the conduct of our clinical trial because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people; (xi) and interruption or delays to our clinical trial activities.

 

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We may not be able to enforce our patent or intellectual property rights against third parties, which could adversely affect the trading price for our common stock.

 

Successful challenge of any patents or future patents or patent applications such as through opposition, re-examination, inter partes review, interference, or derivation proceedings could result in a loss of patent rights in the relevant jurisdiction. Unauthorized disclosure of our claims to our trade secrets could result in loss of those intellectual property rights. Furthermore, because of the substantial amount of discovery required relating to intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during litigation there could be public announcements of the results of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive that we have lost rights to our intellectual property or the results of these disputes are negative, it could have a substantial adverse effect on the price of our common stock.

 

In the event that we fail to satisfy any of the listing requirements of the Nasdaq Capital Market, our common stock may be delisted, which could affect our market price and liquidity.

 

Our common stock is listed on the Nasdaq Capital Market. For continued listing on the Nasdaq Capital Market, we will be required to comply with the continued listing requirements, including the minimum market capitalization standard, the minimum stockholders’ equity requirement, the corporate governance requirements, and the minimum closing bid price requirement, among other requirements. On October 26, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying us that, for the preceding 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period Rule”), the Company has been provided an initial period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement, which ends April 24, 2023 (the “Compliance Date”). If, at any time before the Compliance Date, the bid price for our common stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff will provide written notification to the Company that it complies with the Bid Price Rule, unless the Staff exercises its discretion to extend this 10-day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H).

 

The notice also provides that, if we do not regain compliance with the Minimum Bid Price Requirement by April 24, 2023, we may be eligible for additional time to regain compliance. To qualify for additional time, we are required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement and provide written notice of its intention to cure the minimum bid price deficiency during the second compliance period by effectuating a reverse split, if necessary. If we meet these requirements, we will be granted an additional compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. If the Staff determines that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible for such additional compliance period, Nasdaq will provide notice that the Company’s Common Stock will be subject to delisting.

 

To resolve the noncompliance, we may consider available options, including effecting a reverse stock split, which may not result in a permanent increase in the market price of our common stock and is dependent on many factors, including general economic, market, and industry conditions, the timing and results of our clinical trials, regulatory developments, and other factors detailed from time to time in the reports we file with the SEC. It is not uncommon for the market price of a company’s shares to decline in the period following a reverse stock split. Furthermore, implementation of a reverse stock split requires approval of a majority of the outstanding voting power of our capital stock, and there is no assurance we can obtain that approval.

 

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In the event that we fail to satisfy any of the listing requirements of the Nasdaq Capital Market our common stock may be delisted. If our securities are delisted from trading on the Nasdaq Stock Market, and we are not able to list our securities on another exchange or to have them quoted on the Nasdaq Stock Market, our common stock could be quoted on the OTC Markets or on the Pink Open Market. As a result, we could face significant adverse consequences including:

 

  a limited availability of market quotations for our securities;
  a determination that our common stock is a “penny stock,” which would require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
  a limited amount of news and analyst coverage;
  a decreased ability to obtain additional financing because we would be limited to seeking capital from investors willing to invest in securities not listed on a national exchange; and
  the inability to use short-form registration statements on Form S-3, including the registration statement on Form S-3 we filed in February 2022, to facilitate offerings of our securities.

 

We will need to issue additional equity securities in the future, which may result in dilution to existing investors.

 

We expect to seek the additional capital necessary to fund our future operations through public or private equity offerings, debt financings, and collaborative and licensing arrangements. To the extent we raise additional capital by issuing equity securities, including in a debt financing where we issue convertible notes or notes with warrants and any shares of our common stock to be issued in a private placement, our stockholders may experience substantial dilution. We expect to sell additional equity securities from time to time in one or more transactions at prices and in a manner we determine. If we sell additional equity securities, existing stockholders may be materially diluted. In addition, new investors could gain rights superior to existing stockholders, such as liquidation and other preferences.

 

In addition, the exercise or conversion of outstanding options or warrants to purchase shares of capital stock may result in dilution to our stockholders upon any such exercise or conversion. As of March 20, 2023, we had a significant number of securities convertible into, or allowing the purchase of, our common stock, including 4,787,824 warrants to purchase shares of our common stock, 370,037 options and rights to acquire shares of our common stock that are outstanding under our equity incentive plans, and 17,535 shares of common stock reserved for future issuance under our equity incentive plans.

 

Because we do not expect to declare cash dividends on our common stock in the foreseeable future, stockholders must rely on appreciation of the value of our common stock for any return on their investment.

 

While we have in the past declared and paid cash dividends on our capital stock, we currently anticipate that we will retain future earnings for the development, operation, and expansion of our business and do not expect to declare or pay any additional cash dividends in the foreseeable future. As a result, only appreciation of the public trading price of our common stock, if any, will provide a return to investors.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

Our Current Lease

 

We entered into a lease agreement on November 30, 2022 (the “Lease”) with 1960 South 4250 West LLC (the “Landlord”) pursuant to which we lease approximately 63,156 square feet of space in a building located at 1960 South 4250 West, Salt Lake City, Utah 84104, for a term of five years beginning December 1, 2022, with an option to renew for an additional five years. The initial basic rent is $0.95 per rentable square foot per month, or a total of $59,998 per month, and the monthly basic rent in effect at the end of each year during the Lease term will increase by 4%. In addition, we are obligated to pay the Landlord our proportionate share of operating costs and other expenses based on the portion of the building we occupy, which is approximately 41%. Under the Lease the Landlord is obligated to construct a demising wall between the area rented to us and the rest of the building, which the Landlord intends to lease to other parties. From the date construction begins until completion of the demising wall and related reconstruction items, our rent is reduced by 50%.

 

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Our Prior Lease

 

Our current Lease described above is the end result of two transactions that closed concurrently on November 30, 2022. On December 27, 2017, we entered into a commercial lease agreement (the “Adcomp Lease”) with Adcomp LLC (“Adcomp”) pursuant to which we leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space at 1960 South 4250 West, Salt Lake City, Utah (the “Real Property”) from Adcomp. The initial term of the Adcomp Lease was five years and it expired on November 30, 2022. We had a one-time option to renew for an additional five years and an option to purchase the Property at a purchase price of $17.5 million. The initial base rent under the Adcomp Lease was $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increased 3.0% per annum thereafter. On December 16, 2021, we gave written notice to Adcomp of our election to exercise the option to purchase the Real Property, and on March 14, 2022, we entered into a definitive purchase and sale agreement with Adcomp (the “Purchase Agreement”). In connection with exercising the option to purchase the Real Property, we made an earnest money deposit of $150,000.

 

On October 25, 2021, we signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently amended by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with BCG Acquisitions LLC (“BCG”). Under the BCG Agreement we agreed to sell the Real Property to BCG or its assigns for $17.5 million after we purchased the Real Property from Adcomp, and then lease a portion of the building located on the Real Property. Under the BCG Agreement, BCG made an earnest money deposit totaling $150,000.

 

The Purchase Agreement and BCG Agreement provided for closing of the transactions described above on November 15, 2022, and also provided for an option to extend the closing to November 30, 2022. On November 9, 2022, BCG and we entered into an Addendum to the BCG Agreement (the “Addendum”) providing, in part, for BCG exercising its right to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000, and the exercise of our right under the Purchase Agreement with Adcomp to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000. The Addendum also stated that we would form a single member limited liability company owned by us, which would be used as the vehicle to effectuate purchase of the Real Property from Adcomp at closing, effectuate a change in ownership of the limited liability company to BCG or its assigns, and lease a portion of the building on the Real Property to us to house our operations. Pursuant thereto we formed the Landlord, 1960 South 4250 West LLC, and we assigned to the Landlord all of our rights and obligations under the Purchase Agreement with Adcomp and under the BCG Agreement and Addendum. Also, BCG assigned all of its rights and obligations under the BCG Agreement and Addendum to BC 1960 South Industrial, LLC, a Delaware limited liability company (“BC1960”), which is unaffiliated with the Company.

 

The addendum also provided that BCG would arrange financing from a third-party lender for the Landlord to apply to the purchase of the Real Property under the Purchase Agreement with Adcomp and that BCG would provide such credit enhancements and accommodations necessary to obtain such financing in consideration of the terms of the Addendum that contemplated BCG or its assigns acquiring ownership of the Landlord concurrently with the Landlord’s acquisition of the Real Property from Adcomp.

 

The following transactions occurred concurrently on November 30, 2022:

 

  BC1960 made an unsecured loan of $9,421,993 to the Company in cash pursuant to the terms of the Addendum, a portion of which we contributed to the capital of the Landlord and was applied by the Landlord, together with deposits made under the Purchase Agreement with Adcomp and a security deposit held by Adcomp under the Adcomp Lease, to the purchase of the Real Property;
  A third-party lender made available cash in the amount of $10,976,470 under a trust deed note and trust deed made by the Landlord, which was applied to purchase of the Real Property;
  Upon payment of the purchase price for the Real Property and closing costs, Adcomp transferred title to the Property and related fixtures, equipment, and personal property appurtenant thereto to the Landlord;
  We assigned and transferred to BC1960 all of the membership interest of the Landlord as payment in full of the unsecured loan of $9,421,993 described above and, as a result, we were reimbursed for the deposits we made under the Purchase Agreement with Adcomp and our security deposit held by Adcomp under the Adcomp Lease, as described above; and
  The Landlord and the Company entered into the Lease.

 

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Item 3. Legal Proceedings.

 

On September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Marc Richfield against the Company and certain officers of the Company, Case No. 2:21-cv-00561-BSJ. The Court subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the Company’s product, SkinTE, was improperly registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and (iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control items, including items identified by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its memorandum in opposition to the Company’s motion to dismiss on July 18, 2022. The Company filed its reply memorandum to the Lead Plaintiff’s opposition memorandum on August 11, 2022, and oral argument on the motion to dismiss was held September 8, 2022. At the hearing the judge issued a ruling from the bench dismissing the Complaint without prejudice and granting the Lead Plaintiff leave to file an amended complaint. The Lead Plaintiff filed an amended complaint (the “Amended Complaint”) on October 3, 2022, alleging additional facts. The Company filed a motion to dismiss the Amended Complaint for failure to state a claim on November 2, 2022, Lead Plaintiff filed its brief in opposition to the Company’s motion on December 2, 2022, and the Company filed its reply brief to the Lead Plaintiff brief in opposition on December 23, 2022. Oral argument on the Company’s motion to dismiss the Amended Complaint was held March 6, 2023. Following oral argument, the judge ruled that the Amended Complaint be dismissed with prejudice and requested that we, through our counsel, submit a proposed opinion and order. Once the judge enters the order, the Lead Plaintiff will have 30 days to file a notice of appeal. We are unable to predict at this time whether the Lead Plaintiff will file an appeal.

 

On October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE IND would obtain FDA approval; and (iv) as a result, the public statements regarding the IND were materially false and misleading. The parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint (including any amendment) described above, (2) denial of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to the stipulated stay of the Stockholder Derivative Complaint proceeding. After the order of dismissal with prejudice of the class action lawsuit described above and exhaustion of all appeals by the Lead Plaintiff, the stay of the Stockholder Derivative Complaint will expire. We believe the allegations in the Stockholder Derivative Complaint are without merit and we intend to defend the litigation vigorously after the stay expires. At this early stage of the proceedings we are unable to make any prediction regarding the outcome of the litigation.

 

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In the ordinary course of business, we may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as described above, at December 31, 2022, we were not party to any legal or arbitration proceedings that may have significant effects on our financial position or results of operations. No governmental proceedings are pending or, to our knowledge, contemplated against us. We are not a party to any material proceedings in which any director, member of senior management, or affiliate of ours is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common stock is listed for trading on the Nasdaq Capital Market under the symbol “PTE.” On October 26, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market (“Nasdaq”) notifying us that, for the preceding 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period Rule”), the Company has been provided an initial period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement, which ends April 24, 2023 (the “Compliance Date”). If, at any time before the Compliance Date, the bid price for our common stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff will provide written notification to the Company that it complies with the Bid Price Rule, unless the Staff exercises its discretion to extend this 10-day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H).

 

The notice also provides that, if we do not regain compliance with the Minimum Bid Price Requirement by April 24, 2023, we may be eligible for additional time to regain compliance. To qualify for additional time, we are required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement and provide written notice of its intention to cure the minimum bid price deficiency during the second compliance period by effectuating a reverse split, if necessary. If we meet these requirements, we will be granted an additional compliance period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. If the Staff determines that the Company will not be able to cure the deficiency, or if the Company is otherwise not eligible for such additional compliance period, Nasdaq will provide notice that the Company’s Common Stock will be subject to delisting.

 

At March 15, 2023, there were approximately 88 holders of record of our common stock.

 

Item 6. [Reserved]

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report on Form 10-K.

 

In addition to historical information, this report contains forward-looking statements that involve risks and uncertainties that may cause our actual results to differ materially from plans and results discussed in forward-looking statements. We encourage you to review the risks and uncertainties discussed in the sections entitled Item 1A. “Risk Factors” and “Forward-Looking Statements” included above in this Annual Report on Form 10-K. The risks and uncertainties can cause actual results to differ significantly from those in our forward-looking statements or implied in historical results and trends. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.

 

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Overview

 

PolarityTE is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. Until the end of April 2022, PolarityTE also operated a pre-clinical research business. PolarityTE’s first regenerative tissue product is SkinTE, which is intended for the repair, reconstruction, replacement, and supplementation of skin in patients who have a need for treatment of acute or chronic wounds, burns, surgical reconstruction events, scar revision, or removal of dysfunctional skin grafts.

 

Since the beginning of 2017, we have incurred substantial operating losses and our operations have been financed primarily by public equity financings. The clinical trials for SkinTE and the regulatory process will likely result in an increase in our costs in the foreseeable future, we expect we will continue to incur substantial operating losses as we pursue an IND and BLA, and we expect to seek financing from external sources over the foreseeable future to fund our operations.

 

Regenerative Tissue Product

 

Our first regenerative tissue product is SkinTE. On July 23, 2021, we submitted an IND for SkinTE to the FDA through our subsidiary, PTE-MD, as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. FDA approval of the IND was given in January 2022, which allowed us to commence the first of two pivotal studies needed to support a BLA. Our first pivotal study under our IND is the COVER DFUs Trial.

 

We expect to incur significant operating costs in the next three to four calendar years as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe due to unforeseen expenses, difficulties, complications, delays, and other unknown events. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures for satisfying all the conditions of obtaining FDA licensure for SkinTE.

 

Pre-clinical and Clinical Research and Testing Services

 

Beginning in 2017, we developed internally a laboratory and research capability to advance the development of SkinTE and related technologies, which we operated through our subsidiary, Arches Research, Inc. (“Arches”). At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business to be used, in part, for preclinical studies on our regenerative tissue products, which we operated through our subsidiary IBEX. Through Arches and IBEX, we also offered research and laboratory testing services to unrelated third parties on a contract basis. As noted above, Arches offered COVID-19 testing from the end of May 2020 to August 2021, when it discontinued the service. We sold the IBEX business and related real estate at the end of April 2022. As a result of the foregoing developments, we have not been engaged in any revenue generating operating activity since the end of April 2022 and we do not expect to be engaged in any revenue generating activity unless and until we are successful in obtaining a BLA for SkinTE.

 

Business Effects of COVID-19

 

We do not believe that COVID-19 had a significant impact on our business activities in 2022, which is consistent with the trend we observed in 2021 that the impact of the COVID-19 pandemic waned as a result of the broad distribution of vaccines and effects of sustained public health actions to mitigate the spread of disease. Nevertheless, a significant resurgence of COVID-19 attributable to a news strain of the disease or the rise of a new pandemic could adversely affect our employees, patients, clinicians, communities, and business operations, as well as the U.S. economy and financial markets. The full extent to which any such pandemic could directly or indirectly impact the timing and cost of pursuing FDA licensure of SkinTE under a BLA is highly uncertain and cannot be predicted.

 

Recent Developments

  

On December 27, 2022, we issued a press release announcing that we signed a non-binding letter of intent (the “LOI”) with Michael Brauser (“Brauser”) for him to make an offer to acquire 100% of our outstanding equity interests at a proposed offering price of $1.03 per common share, which would be paid entirely in cash. Completion of the transaction was subject to Brauser conducting due diligence investigations, the negotiation and execution of definitive transaction documents, Brauser successfully acquiring a majority of the outstanding common stock of the Company, and other customary closing conditions. The LOI provided that Brauser would pursue due diligence and the parties would endeavor to negotiate the terms of the definitive transaction documents during the period ending March 15, 2022. We and Brauser were unable to complete negotiation and drafting of definitive documents by March 15, 2023, and the LOI terminated on that date. Even though the LOI terminated, new proposals for a potential transaction between us and Mr. Brauser are under discussion, and we are also pursuing a process of evaluating our financial resources, product opportunities, and business plan with a view to advancing the interests of our stockholders. 

 

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Liquidity and Capital Resources

 

Available Capital Resources and Potential Sources of Liquidity

 

As of December 31, 2022, we had $11.4 million in cash and cash equivalents and working capital of $11.2 million. As of December 31, 2021, we had $19.4 million in cash and cash equivalents, and working capital of $17.7 million. For each of the years ended December 31, 2022 and 2021, cash used in operating activities was $22.6 million, or an average of $1.9 million per month.

 

As of the date of this annual report we do not expect that our cash and cash equivalents of $11.4 million as of December 31, 2022, will be sufficient to fund our current business plan including related operating expenses and capital expenditure requirements beyond the second calendar quarter of 2023. Accordingly, there is substantial doubt about our ability to continue as a going concern, as we do not believe that our cash and cash equivalents will be sufficient to fund our business plan for at least twelve months from the date of issuance of our annual financial statements in this report. We plan to address this condition by raising additional capital to finance our operations.

 

After April 2022 we have not engaged in any business activity that generates cash flows from operations, which in the past contributed to defraying our operating costs, and we do not expect we will be engaged in any operating business activity that would generate cash flow in the foreseeable future. Accordingly, we expect we will be dependent on obtaining capital from external sources to fund our operations over the next three to four years. Although we have been successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so we may not be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that our plan to raise additional capital will alleviate the substantial doubt regarding our ability to continue as a going concern.

 

Anticipated Uses of Capital Resources

 

As noted above, we are focused primarily on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE. To that end, in June 2021 we engaged a CRO to provide services for the COVER DFUs Trial at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In 2021 we prepaid $0.5 million, which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the COVER DFUs Trial the service provider will submit to us for payment monthly invoices for units of work stated in the work order that are completed and billable expenses incurred. We began enrolling subjects in our COVER DFUs at the end of April 2022, and we believe we may be able to complete enrollment of 100 subjects sometime in the first six months of 2024. As enrollment increases, we expect our monthly CRO and related costs of conducting the trial will ramp up.

 

Our expectation is that the second DFU clinical trial under the IND for SkinTE will be similar to the COVER DFUs Trial with respect to size, length of time to complete, and cost. To the extent we decide to pursue additional indications for the application of SkinTE, we expect we will need to submit separate IND applications for those indications and conduct additional clinical trials to support BLAs for those indications.

 

Clinical trials are the major expense we see in the near and long term, and while we are pursuing clinical trials, we will continue to incur the costs of maintaining our business. In addition to clinical trials, our most significant uses of cash to maintain our business going forward are expected to be compensation, costs of occupying, operating, and maintaining our facilities, and the costs associated with maintaining our status as a publicly traded company. During the 12-month period following the filing of this report our plan is to preserve the facilities, equipment, and staff we need to advance the COVER DFUs Trial and other work necessary for advancing the process for obtaining regulatory approval of SkinTE.

 

With the acceptance of our IND for SkinTE and the beginning of the COVER DFUs Trial, we do not expect to have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff in April 2022.

 

During the latter part of 2021 and into February 2022, we engaged in discussions with certain third parties regarding potential M&A transactions and strategic initiatives. In the first quarter of 2022 we recognized $1.2 million of one-time costs for professional services associated with such M&A and strategic initiatives, which is in addition to $1.2 million of such costs recognized in the fourth quarter of 2021.

 

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Our actual capital requirements will depend on many factors, including the cost and timing of advancing our IND and subsequent BLA for the use of SkinTE on DFUs, the cost and timing of additional INDs and BLAs for other indications where SkinTE may be used, the cost and timing of clinical trials, the cost of establishing and maintaining our facilities in compliance with current good tissue practices and current good manufacturing practice requirements, and the cost and timing of advancing our product development initiatives related to SkinTE. Our projection of the period of time for which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially.

 

We will need to raise additional capital in the future to fund our effort to obtain FDA approval of SkinTE and maintain our operations. Any additional equity financing including financings involving convertible securities, if able to be obtained, may be highly dilutive, on unfavorable terms, or otherwise disadvantageous, to existing stockholders. Debt financing, if available, may involve restrictive covenants or require us to grant a security interest in our assets. If we elect to pursue collaborative arrangements, the terms of such arrangements may require us to relinquish rights to certain of our technologies, products, or marketing territories. Our failure to raise additional capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to continue operations, any of which would have a material adverse effect on our business, financial condition, results of operation, and prospects.

 

Results of Operations

 

Changes in Our Operations

 

There have been significant changes in our operations affecting results of operations for the year ended December 31, 2022, compared to year ended December 31, 2021.

 

On July 23, 2021, we submitted an IND for SkinTE to the FDA through our subsidiary, PTE-MD, as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. FDA approval of the IND was given in January 2022, which allowed us to commence the first of two pivotal studies needed to support a BLA for SkinTE. We ceased selling SkinTE at the end of May 2021, when the period of enforcement discretion previously announced by the FDA with respect to its IND and premarket approval requirements for regenerative medicine therapies, such as SkinTE, came to an end, and we do not expect to be able to commercialize SkinTE until our BLA is approved, which we believe will take at least three to four years. Consequently, we recognized products net revenues in 2021, and did not have any such revenues in 2022.

 

Arches began offering COVID-19 testing services in May 2020 under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state of New York controlled by a single company, which substantially added to our services net revenues in the first three months of 2021. When the New York nursing homes and pharmacies adopted on-site employee testing at the end of March 2021, our COVID-19 testing revenues declined substantially, and in August 2021, we decided to cease COVID-19 testing. Arches focused its research and development resources on supporting our IND and clinical trial efforts for the remainder of 2021. However, we do not expect we will have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff in April 2022, and began to eliminate or sell certain items of equipment that had been leased or purchased for our research and development activity.

 

At the beginning of May 2018, we acquired IBEX. As described above, Utah CRO, our direct subsidiary, held all of the IBEX Shares and all the member interest of IBEX Property, which owned the Property used in IBEX operations. At the end of April 2022, Utah CRO sold all the IBEX Shares to an unrelated third party in exchange for a promissory note in the principal amount of $0.4 million bearing simple interest at the rate of 10% per annum payable interest only on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares. On the same day IBEX Property closed the sale of the Property to an affiliate of the same party that purchased the IBEX Shares and we realized net cash proceeds of $2.3 million, after deducting closing costs and advisory fees. Prior to April 2022, while we were exploring the opportunities for selling IBEX and IBEX Property, IBEX assumed a more passive approach to marketing its services, which resulted in a decline in IBEX services revenues in 2022 prior to the sale. Accordingly, our services net revenues were nominal from the beginning of 2022 through the sale of IBEX and the Property completed at the end of April 2022, and services net revenues generated by IBEX ended permanently after the sale.

 

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As a result of the foregoing developments, we made a number of changes to our operations that impacted our results of operations. These included reductions in our work force and reducing the services and infrastructure needed to support a larger work force and commercial sales effort.

 

Comparison of the years ended December 31, 2022, and December 31, 2021.

 

   For the Year Ended December 31,   Increase (Decrease) 
   2022   2021   Amount   Percent 
Net revenues                     
Products   $   $3,076   $(3,076)   (100)%
Services    814    6,328    (5,514)   (87)%
Total net revenues    814    9,404    (8,590)   (91)%
Cost of revenues                     
Products        448    (448)   (100)%
Services    616    3,868    (3,252)   (84)%
Total costs of revenues    616    4,316    (3,700)   (86)%
Gross profit    198    5,088    (4,890)   (96)%
Operating costs and expenses                     
Research and development    11,048    14,182    (3,134)   (22)%
General and administrative    15,027    20,476    (5,449)   (27)%
Sales and marketing        2,808    (2,808)   (100)%
Restructuring and other charges   103    678    (575)   (85)%
Gain on sale of property and equipment   (4,000)       (4,000)   (100)%
Impairment of assets held for sale   393        393 100 %      
Impairment of goodwill and intangible assets       630    (630)   (100)%
Total operating costs and expenses    22,571    38,774    (16,203)   (42)%
Operating loss    (22,373)   (33,686)   11,313    34%
Other income (expense), net                     
Gain on extinguishment of debt       3,612    (3,612)   (100)%
Change in fair value of common stock warrant liability   14,468    4,995    9,473    190%
Inducement loss on sale of liability classified warrants       (5,197)   5,197    100%
Interest expense, net   (11)   (127)   116    91%
Other income, net    83    216    (133)   (62)%
Net loss   $(7,833)  $(30,187)  $22,354    74%

 

Net Revenues and Gross Profit. We ceased commercial sales of SkinTE in the second calendar quarter of 2021 and sold the IBEX services business at the end of April 2022, so we were not engaged in any revenue generating business activity at December 31, 2022, and do not expect to generate operating revenues from any business activity for the foreseeable future. The decreases in revenues, cost of revenues, and gross profit for 2022 compared to the same periods in 2021 are consistent with our cessation of revenue-generating business activity.

 

Operating Costs and Expenses. Operating costs and expenses decreased $16.2 million, or 42%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

 

Research and development expenses decreased 22% for the year ended December 31, 2022, compared to the year ended December 31, 2021. The decrease is primarily attributable to costs incurred in 2021 for completing our pre-IND diabetic foot ulcers trial, lab supplies for work on preparing the technical items for our IND, and consulting services for preparing our IND that did not recur in 2022, which was partially offset by an increase in research and development expenses primarily attributable to SkinTE manufacturing and overhead personnel redirecting their efforts following the cessation of SkinTE sales to research and development activities, manufacturing costs for SkinTE produced for use in the COVER DFUs Trial, and increased costs related to quality control supplies and infrastructure implemented for the COVER DFUs Trial.

 

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The amount of general and administrative expenses decreased 27% for the year ended December 31, 2022, compared to the year ended December 31, 2021. We effectuated a reduction in force for our commercial operations in the second quarter of 2021. Consequently, there were reductions in cash compensation, stock compensation, consulting fees, and travel expense. Furthermore, with the cessation of SkinTE sales we re-allocated manufacturing supplies and compensation from general and administrative expenses to research and development costs. These reductions were partially offset by professional fees incurred in connection with our pursuit of a strategic transaction in 2021 and the first two months of 2022 that did not materialize, and investment banking fees paid in connection with an at-the-market offering we terminated in the first quarter of 2022.

 

In 2021 we incurred sales and marketing costs related to our commercial sales effort that did not recur in 2022. In connection with terminating commercial sales of SkinTE in 2021, we realized as a restructuring charge a loss on impairment of property and equipment in the amount of $0.4 million and a charge of $0.6 million for employee severance and revaluing of equity awards related to severance, which was offset by a gain of $0.3 million from early termination of an office/ laboratory lease in Augusta, Georgia.

 

In 2022 we realized a charge of $0.4 million from impairment of equipment to be sold and $0.1 million of restructuring charges on employee severance.

 

Pursuant to a transaction described under “Item 2. Properties,” above, we closed on November 30, 2022, transactions that had the effect of assigning a subsidiary we created to effectuate a purchase of real property we occupied in Salt Lake City, Utah, to an unrelated third party and our lease of a portion of that property from that subsidiary. In accordance with FASB ASC Topic 842, the transaction is accounted for as a sale and a leaseback and we are required to recognize a pre-tax gain on sale, which is the difference between the fair value of the property sold and the sale price, of $4.0 million, which is recorded within operating expenses on the consolidated statements of operations, even though we did not receive any net cash from the assignment of the subsidiary.

 

Operating Loss and Net Loss. Operating loss decreased $11.3 million, or 34%, for the year ended December 31, 2022, compared to the year ended December 31, 2021. Net loss decreased $22.4 million, or 74%, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

 

Warrants issued in connection with financings we completed in 2022, 2021 and 2020 are classified as liabilities and remeasured each period until settled, classified as equity, or expiration. As a result of the periodic remeasurement, we recorded a gain for change in fair value of common stock warrant liability of $14.5 million for the year ended December 31, 2022, compared to a gain of $5.0 million for the year ended December 31, 2021. For additional information on the change in fair value of common stock warrant liability please see Note 4 to the consolidated financial statements for the years ended December 31, 2022 and 2021, included in this report.

 

We issued common stock purchase warrants in January 2021, as an inducement to holders of warrants issued in December 2020 to exercise those December warrants. As a result, we recognized an inducement loss of $5.2 million for the year ended December 31, 2021. There was no similar inducement loss in 2022. On April 12, 2020, PTE-MD (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3.6 million (the “Loan”) made to it under the Paycheck Protection Program (“PPP”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all, or a portion of, a loan granted under the PPP. PTE-MD applied for forgiveness of the Loan, which was granted in June 2021 and resulted in a gain on extinguishment of debt in the amount of $3.6 million in 2021. There was no similar gain in 2022.

 

As noted above, the transactions we closed November 30, 2022, resulting in a disposition of the subsidiary we created to effectuate a purchase of real property we occupied in Salt Lake City, Utah, to an unrelated third party and our lease of a portion of that property from that subsidiary, we recognized a pre-tax gain on sale of $4.0 million, which is recorded within operating expenses on the consolidated statement of operations, even though we did not receive any net cash from the assignment of the subsidiary. There was no similar gain in 2021.

 

Non-GAAP Financial Measure

 

The table below provides a reconciliation of adjusted net loss, which is a non-GAAP measure that shows net loss before fair value adjustments relating to our common stock warrant liability and warrant inducement loss to GAAP net loss. We believe adjusted net loss is useful to investors because it eliminates the effect of non-operating items that can significantly fluctuate from period to period due to fair value remeasurements. For purposes of calculating non-GAAP per share metrics, the same denominator is used as that which was used in calculating net loss per share under GAAP. Other companies may calculate adjusted net loss differently than we do. Adjusted net loss has limitations as an analytical tool and you should not consider adjusted net loss in isolation or as a substitute for our financial results prepared in accordance with GAAP.

 

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Adjusted Net Loss Attributable to Common Stockholders

(in thousands - unaudited non-GAAP measure)

 

  

For the Year Ended

December 31,

 
   2022   2021 
GAAP net loss  $(7,833)  $(30,187)
Change in fair value of common stock warrant liability   (14,468)   (4,995)
Inducement loss on sale of liability classified warrants       5,197 
Non-GAAP adjusted net loss attributable to common stockholders – basic & diluted  $(22,301)  $(29,985)
           
GAAP net loss per share attributable to common stockholders          
Basic*  $(1.14)  $(9.43)
Diluted*  $(1.67)  $(9.43)
           
Non-GAAP adjusted net loss per share attributable to common stockholders          
Basic and diluted*  $(3.25)  $(9.37)

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

Critical Accounting Policies and Estimates

 

Stock-Based Compensation. We measure all stock-based compensation to employees and non-employees using a fair value method. For stock options with graded vesting, we recognize compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant. The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on our historical stock prices. Forfeitures are recognized as they occur. The fair value of restricted stock grants is measured based on the fair market value of our common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.

 

Common Stock Warrant Liability. The fair value of the common stock warrant liability is estimated using the Monte Carlo simulation model, which involves simulated future stock price amounts over the remaining life of the commitment. The fair value estimate is affected by our stock price as well as estimated change of control considerations.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

As a smaller reporting company, we are not required to provide the information under this item, pursuant to Regulation S-K Item 305(e).

 

Item 8. Financial Statements and Supplementary Data.

 

The financial statements required by Item 8 are submitted in a separate section of this report beginning on Page F-1 and are incorporated herein and made a part hereof.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures.

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.

 

Management’s Report on Internal Control Over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States (“GAAP”). Our internal control over financial reporting includes those policies and procedures that:

 

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022. In making this assessment, management used the framework set forth in the report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management determined that our system of internal control over financial reporting was effective as of December 31, 2022.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three-month period ended December 31, 2022.

 

Item 9B. Other Information.

 

None.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

 

None.

 

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PART III

 

ITEM 10. Directors, Executive Officers, and Corporate Governance

 

Board of Directors

 

Our Board currently consists of four members and is divided into three classes. The term of office for the directors in each class is three years, and the term expirations of the three classes are staggered so that only one of the three classes of directors is up for election in each year. The following table sets forth the names, ages and class designation of all our directors.

 

  Peter A. Cohen   76   Class I Director, Chairman
  Willie C. Bogan   73   Class II Director
  Jeff Dyer   64   Class II Director
  David Seaburg   53   Class III Director

 

The following is a summary of the background and qualifications of each of our directors.

 

Peter A. Cohen joined the Board in June 2018 and became Chairman of the Board in August 2019. Mr. Cohen has served as Vice Chairman of the Board and Lead Independent Director of Scientific Games Corporation since September 2004. Mr. Cohen was Chairman of Cowen Inc. (formerly known as Cowen Group, Inc.), a diversified financial services company, and served as Chairman and Chief Executive Officer from 2009 through December 2017. Mr. Cohen was a founding partner and principal of Ramius LLC, a private investment management firm formed in 1994 that was combined with Cowen in late 2009. Mr. Cohen served as a member of the board of directors of Chart Acquisition Corp. (which, as a result of a business combination, is now known as Tempus Applied Solutions Holdings, Inc.) from 2013 to 2015. From November 1992 to May 1994, Mr. Cohen was Vice Chairman of the Board and a director of Republic New York Corporation, as well as a member of its executive management committee. Mr. Cohen was Chairman and Chief Executive Officer of Shearson Lehman Brothers from 1983 to 1990. Mr. Cohen is qualified to serve as a member of the Board because of his experience in capital markets and finance, his experience with analyzing and evaluating financial statements and related budgetary matters, and his knowledge of commercial and business practices.

 

Willie C. Bogan, JD, joined the Board in April 2018. Mr. Bogan served as Associate General Counsel and Corporate Secretary of McKesson Corporation (“McKesson”), a San Francisco-based healthcare services and information technology company (which relocated its headquarters to Las Colinas, TX in 2019) currently ranked 9th on the Fortune 500, from July 2009 until his retirement from McKesson in November 2015. He joined McKesson in November 2006 as Associate General Counsel and Assistant Secretary. Before joining McKesson, Mr. Bogan held senior advisory positions at the following public companies in the San Francisco Bay Area: Bank of America; Safeway; Charles Schwab; and Catellus Development Corporation, a real estate development company. Prior to becoming in-house counsel, he was a partner at Steinberg Miller Bogan & Goldstein in Manhattan Beach, California. He started his law career as a law firm associate in Los Angeles, California. Mr. Bogan graduated Phi Beta Kappa and Summa Cum Laude from Dartmouth College where he majored in Spanish. He received an M.A. degree in Politics and Economics from Oxford University where he studied as a Rhodes Scholar. He earned his J.D. degree from Stanford Law School. Mr. Bogan is qualified to serve as a member of the Board because of his knowledge of the healthcare industry and his experience as an advisor to public companies and their boards of directors on securities law and corporate governance matters.

 

Jeff Dyer, PhD, re-joined the Board in January 2023, and previously served on the Board from March 2, 2017, to September 2, 2022. Dr. Dyer has served as the Horace Beesley Professor of Strategy at Brigham Young University since September 1999. From August 1993 until September 1999, he served as an Assistant Professor at Wharton School, University of Pennsylvania, and from July 1984 until September 1988 he served as Management Consultant and Manager of Bain & Company. Dr. Dyer received his Bachelor of Science degree in psychology and MBA from Brigham Young University and his PhD in management from University of California, Los Angeles. Dr. Dyer is qualified to serve as a member of the Company’s Board because of his extensive business and management expertise and knowledge of capital markets.

 

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David Seaburg, has served as Chief Executive Officer and President of the Company from August 2019 through August 2021 when he joined the Board and agreed to a consulting agreement with the Company. Prior to becoming Chief Executive Officer and President, he served as President of Corporate Development for the Company beginning in March 2019, and before that a consultant to the Company beginning in August 2018. Prior to March 16, 2019, he served as the Managing Director and Head of Sales Trading at Cowen & Company, a diversified financial services company. Over the course of his 20+ year career at Cowen in both Equity Sales Trading and Trading, Mr. Seaburg advanced to increasingly senior level roles at the firm. In 2006, Mr. Seaburg was named Head of Sales Trading and appointed to the firm’s Equity Operating Committee. Mr. Seaburg was a CNBC Fast Money Contributor and provided regular on-air commentary for the network. Mr. Seaburg holds a Bachelor of Arts degree in Business Finance and Economics from Northeastern University. Mr. Seaburg is qualified to serve as a member of the Board because of his knowledge of the Company’s operations, his experience in capital markets and finance, his experience with analyzing and evaluating financial statements and related budgetary matters, and his knowledge of commercial and business practices.

 

Executive Officers

 

The following table sets forth the names, and positions of our executive officers.

 

  Richard Hague   Chief Executive Officer and President
  Jacob Patterson   Chief Financial Officer

 

The following is a summary of the background of each of our executive officers.

 

Richard Hague, age 63, joined the Company as Chief Operating Officer in April 2019, was appointed President in August 2019, and became Chief Executive Officer and President in August 2021. From October 2015 to April 2019, he served as Chief Commercial Officer of Anika Therapeutics, Inc. From November 2014 to October 2015, Mr. Hague was the Vice President Sales and Marketing at TEI Medical where he was responsible for driving the revenue growth of that corporation’s dermal scaffold product, as well as for the build out of its sales and marketing teams. From 2011 through 2014, Mr. Hague was Vice President Sales, Marketing, and Commercial Operations for Sanofi Biosurgery’s Cell Therapy and Regenerative Medicine group. In this role, Mr. Hague was responsible for the global commercial operations of the group’s products in the orthopedic sports medicine and burn markets. Prior to this, Mr. Hague was the Senior Director and Head of Sales for Genzyme Biosurgery where he headed the U.S. sales team in the orthopedics and sports medicine market. Mr. Hague holds a B.S. in marketing from the University of Connecticut.

 

Jacob Patterson, age 45, joined the Company in January 2018 and served as Vice President of Finance prior to his engagement as Chief Financial Officer at the end of March 2020. From October 2016 to January 2018, Mr. Patterson was a Finance Director with GameStop where he had responsibility for forecasting and budgeting for a division with $700 million in annual revenue and participating in the development of financial policies and controls. For approximately six years prior to October 2016, Mr. Patterson was a Finance Director with Thermo Fisher Scientific, most recently in the Protein and Cell Analysis business unit where he had responsibility for acquisition integration, building a finance and accounting staff, supervising financial controls, financial statement reporting and analysis, and assisting with financial analysis for budgeting and strategic growth. Mr. Patterson earned an MBA (Accounting Emphasis) from Utah State University.

 

Code of Conduct

 

Our Code of Business Ethics and Practices (the “Code”), which was adopted January 11, 2019, applies to our employees, directors, and officers (“Covered Persons”). This includes our Chief Executive Officer and Chief Financial Officer, among others. We require that they avoid conflicts of interest, comply with applicable laws, protect Company assets, and conduct business in an ethical and responsible manner and in accordance with the Code. The Code prohibits employees from taking unfair advantage of our business partners, competitors, and employees through manipulation, concealment, misuse of confidential or privileged information, misrepresentation of material facts, or any other practice of unfair dealing or improper use of information. The Code requires employees to comply with all applicable laws, rules, and regulations wherever in the world we conduct business. This includes applicable laws on privacy and data protection, and anti-corruption and anti-bribery. Our Code is publicly available and can be found on our website at www.polarityte.com by following the link to “Investor & News”, then to “Governance”, and then to “Governance Documents.” We intend to disclose any amendments to or waivers from the Code by posting such information on our website.

 

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Procedure for Recommending Directors

 

There has not been a material change to the procedures by which security holders may recommend nominees for election to our Board since April 8, 2022, the date we filed our Proxy Statement for the special meeting of stockholders held on May 12, 2022.

 

Audit Committee

 

Our Board has a standing Audit Committee. The Board has affirmatively determined the Audit Committee is composed of independent directors, as independence is defined for members of an audit committee in the rules of The NASDAQ Stock Market and Rule 10A-3(b)(1) adopted under the Exchange Act. The members of the Audit Committee at December 31, 2022, were Chris Nolet, Peter A. Cohen, and Willie Bogan, and the Board had previously determined that Chris Nolet met the qualification requirements of an audit committee financial expert as defined in Item 407 of Regulation S-K. As of the date of filing this annual report, the members of the Audit Committee are Peter A. Cohen, Willie Bogan, and Jeff Dyer, and the Board has determined that Peter A. Cohen meets the qualification requirements of an audit committee financial expert as defined in Item 407 of Regulation S-K.

 

Item 11. Executive Compensation

 

Summary Compensation Table

 

The following Summary Compensation Table sets forth summary information as to compensation paid or accrued to our named executive officers (“NEOs”) during the fiscal years ended December 31, 2022 and 2021. Our NEOs include our principal executive officer during 2022, and one additional person who is our only other executive officer serving at the end of the last completed fiscal year. The Summary Compensation Table also includes one individual who served as an executive officer during the last completed fiscal year and would have been one of the two most highly compensated executive officers had the individual been serving at the end of the fiscal year.

 

Name and

Principal Position

  Year     Salary
($)
    Bonus
($)
   

Stock

Awards
($)(1)

   

All Other Compensation

($)

    Total
($)
 
(a)   (b)     (c)     (d)     (e)     (i)     (j)  
Richard Hague (2)     2022       448,558       31,250       -0-       -0-       479,808  
Chief Executive Officer,     2021       359,421       410,000       471,950       -0-       1,241,371  
President                                                
                                                 
Jacob Patterson (3)     2022       251,971       -0-       -0-       10,878       262,849  
Chief Financial Officer     2021       246,700       181,000       329,440       10,440       767,580  
                                                 
Cameron Hoyler (4)     2022       296,231       25,000       -0-       14,249       335,480  
General Counsel, EVP     2021       356,393       316,250       384,230       15,337       1,072,210  
Secretary, Chief                                                
Compliance Officer                                                

 

(1)The figure in this column represents the aggregate grant date fair value for restricted stock awards granted during the reported periods computed in accordance with FASB ASC Topic 718. See Note 12 to our consolidated financial statements presented in this Annual Report on Form 10-K for details as to the assumptions used to determine the grant date fair value of the restricted stock awards.

 

(2)Notes to Richard Hague compensation items. Effective July 1, 2019, Mr. Hague agreed to reduce his salary from an annual base salary of $370,000 to an annual base salary of $185,000 for a two-year period ending June 30, 2021. In exchange for the reduction in salary Mr. Hague was granted 5,193 shares of common stock restricted from transfer by reference to continued employment by the Company, and the restriction on transfer lapsed with respect to 1,443 shares in 2021. The salary figure for 2021 includes $91,077 for the salary that Mr. Hague agreed to forego for 2021 in exchange for restricted shares of common stock granted in 2019. The grant date fair value of the restricted stock granted to Mr. Hague was $727,020, so the difference between that value and the total amount of salary he agreed to forego over two years is $357,020.

 

 45 

 

 

In December 2021, Mr. Hague was awarded as a bonus for service in 2021, 15,000 restricted stock awards that vest one-third on the award grant date, one-third on the six-month anniversary of the grant date, and one-third on the 12-month anniversary of the grant date, which had a grant date fair value of $163,950 and $275,000 in cash. In April 2021, Mr. Hague was awarded as a bonus for service in 2020, 6,000 restricted stock units that vest quarterly over a period of three years, which had a grant date fair value of $132,000 and $125,000 in cash paid in four equal installments every three months beginning with the first payment in April 2021. Also in April 2021, the Board approved 8,000 performance-based restricted stock units for Mr. Hague with respect to the 12-month period commencing April 1, 2021, with a grant date fair value of $176,000, which will vest over that period on the basis of operational, regulatory, and clinical development goals established and evaluated by the Compensation Committee of the Board.

 

(3)Notes to Jacob Patterson compensation items. In December 2021, Mr. Patterson was awarded as a bonus for service in 2021, 8,000 restricted stock awards that vest one-third on the award grant date, one-third on the six-month anniversary of the grant date, and one-third on the 12-month anniversary of the grant date, which had a grant date fair value of $87,440 and $156,000 in cash. In April 2021, Mr. Patterson was awarded as a bonus for service in 2020, 6,000 restricted stock units that vest quarterly over a period of three years, which had a grant date fair value of $132,000 and $25,000 in cash. Also in April 2021, the Board approved 5,000 performance-based restricted stock units for Mr. Patterson with respect to the 12-month period commencing April 1, 2021, with a grant date fair value of $110,000, which will vest over that period on the basis of operational, regulatory, and clinical development goals established and evaluated by the Compensation Committee of the Board.

 

In 2022 and 2021 employer contributions to Mr. Patterson under our 401(k) defined benefit plan totaled $10,878 and $10,440, respectively, which are listed under column (i) of the table. Mr. Patterson’s pre-tax contributions are included in his salary amounts for 2022 and 2021 listed in the table.

 

(4)Notes to Cameron Hoyler compensation items. Effective August 15, 2022, the employment arrangement with Mr. Hoyler in effect prior to that date was amended so that he would continue in a part-time capacity and cease to be an NEO. The 2022 salary amount under column (c) of the table includes the compensation paid to Mr. Hoyler after August 15, 2022.

 

Effective July 1, 2019, Mr. Hoyler agreed to reduce his salary from an annual base salary of $400,000 to an annual base salary of $360,000 for a two-year period ending June 30, 2021. In exchange for the reduction in salary Mr. Hoyler was granted 673 shares of common stock restricted from transfer by reference to continued employment by the Company, and the restriction on transfer lapsed with respect to 187 shares in 2021. The salary figure for 2021 includes $19,693 for the salary that Mr. Hoyler agreed to forego for 2021 in exchange for restricted shares of common stock granted in 2019. The grant date fair value of the restricted stock granted to Mr. Hoyler was $94,315, so the difference between that value and the total amount of salary he agreed to forego over two years is $14,315.

 

In December 2021, Mr. Hoyler was awarded as a bonus for service in 2021, 11,000 restricted stock awards that vest one-third on the award grant date, one-third on the six-month anniversary of the grant date, and one-third on the 12-month anniversary of the grant date, which had a grant date fair value of $120,230 and $210,000 in cash. In April 2021, Mr. Hoyler was awarded as a bonus for service in 2020, 6,000 restricted stock units that vest quarterly over a period of three years, which had a grant date fair value of $132,000 and $100,000 in cash paid in four equal installments every three months beginning with the first payment in April 2021. Also in April 2021, the Board approved 6,000 performance-based restricted stock units for Mr. Hoyler with respect to the 12-month period commencing April 1, 2021, with a grant date fair value of $132,000, which will vest over that period on the basis of operational, regulatory, and clinical development goals established and evaluated by the Compensation Committee of the Board.

 

As of January 1, 2022, Mr. Hoyler had an employment agreement with an annual base salary of $350,000. Effective August 15, 2022, Mr. Hoyler’s employment agreement was amended so that beginning August 16, 2022, Mr. Hoyler ceased to serve as General Counsel, Corporate Secretary, EVP Corporate Development & Strategy, and Chief Compliance Officer, and become a part-time employee with the position of “Corporate Counsel” providing advisory services related to Company legal matters and, to that end, provide 250 hours of service to the Company in each calendar quarter during the term of the amended employment agreement. Mr. Hoyler’s salary for the 12-month period ending August 15, 2023, is $205,000.

 

 46 

 

 

In 2022 and 2021 employer contributions to Mr. Hoyler under our 401(k) defined benefit plan totaled $14,249 and $15,337, respectively, which are listed under column (i) of the table. Mr. Hoyler’s pre-tax contributions are included in his salary amount for 2022 and 2021 listed in the table.

 

Narrative Disclosure to Summary Compensation Table

 

The annual base salaries for Richard Hague, Chief Executive Officer and President, and Jacob Patterson, Chief Financial Officer, are $450,000, $275,000, respectively. Mr. Hague’s annual base salary was $166,500 from April 19, 2020, through June 30, 2021, and $375,000 from July 1, 2021, to December 20, 2021. Mr. Patterson’s annual base salary was $234,000 from April 19, 2020, to June 30, 2021, and $260,000 from July 1, 2021, to December 20, 2021.

 

On August 18, 2021, the Board approved written employment agreements for Messrs. Hague and Patterson. Under the employment agreements, base salary may be increased any time, but can be decreased only on July 1 of each year. Each executive is eligible for an annual cash bonus with a target equal to a percentage of base salary, which is 60% of base salary for Messrs. Hague and Patterson. An annual bonus may be based, in whole, in part, or not at all, on the executive’s performance or the performance of the Company, the Board has the discretion to award a bonus that is higher or lower than the target amount or award no bonus at all, an annual bonus awarded for one year is paid on or about February 1 of the following year, and an annual bonus is not deemed earned until paid. Messrs. Hague and Patterson are eligible to participate in any equity incentive or equity purchase plan established by the Company, as determined by the Board in its sole discretion. Messrs. Hague and Patterson are also entitled to fringe benefits and perquisites commensurate with those provided to similarly situated executives of the Company. They are entitled to 20 days paid vacation each calendar year and are entitled to participate in all Company employee benefit plans, practices, and programs generally applicable to Company employees. The employment agreements include a “clawback” right with respect to compensation based on achieving results or stock prices if there is a restatement of financial results with respect to which the determination of compensation is made. Under their employment agreements, Messrs. Hague and Patterson are employed at-will and may be terminated at any time. If termination is due to death or disability, the executive (or heirs) is entitled to receive the then base salary for six months and reimbursement of the cost of health care benefits for six months to the extent an election is made to continue benefits under the Consolidated Budget Reconciliation Act of 1985, as amended (“COBRA”). If the executive is terminated for cause or the executive resigns without good reason, the executive is not entitled to payment of any additional compensation post termination. However, if the executive resigns due to retirement after age 65, the executive is entitled to receive a retirement payment equal to three months of base salary. If the executive is terminated without cause or the executive resigns for good reason, the executive is entitled to payment of additional compensation post termination, which is 12 months of base salary for Mr. Hague and six months of base salary for Mr. Patterson, a lump sum payment equal to a portion of the executive’s annual bonus at target (100% for Mr. Hague and 50% for Mr. Patterson), and reimbursement of the cost of health care benefits to the extent the executive has elected to continue benefits under COBRA (12 months for Mr. Hague and six months for Mr. Patterson).

 

Cameron Hoyler had an employment agreement with the Company dated August 18, 2021, with the same terms as Mr. Hague’s employment agreement described in the preceding paragraph. This agreement was amended effective August 15, 2022, and again on March 13, 2023, so that beginning August 16, 2022, Mr. Hoyler ceased to serve as General Counsel, Corporate Secretary, EVP Corporate Development & Strategy, and Chief Compliance Officer, and become a part-time employee with the position of “Corporate Counsel” providing advisory services related to Company legal matters and, to that end, provide 250 hours of service to the Company in each calendar quarter during the term of the amended employment agreement. Mr. Hoyler’s salary for the 12-month period ending August 15, 2023, is $155,000, which the Company is obligated to pay in full should Mr. Hoyler be terminated by the Company without “cause” (as defined in the amended employment agreement) prior to the end of that 12-month period. There are no other severance payments or benefits under the Agreement. After August 15, 2023, Mr. Hoyler’s salary will be $7,083 per month. Bonus compensation may be paid at the Company’s sole discretion. After August 15, 2022, Mr. Hoyler is not entitled to participate in any fringe benefits that are made available to employees or accrue any paid time off. Due to the limited hours of service, Mr. Hoyler is not eligible to participate in the Company’s employee benefit plans in which eligibility requires at least 30 hours of service per week or 130 hours of service per month. Prior to the amendment of the employment agreement, Mr. Hoyler’s annual salary was $350,000.

 

 47 

 

 

Change in Control Payments

 

The employment agreements with Messrs. Hague and Patterson provide that if the Company participates in a “fundamental transaction” and the executive’s employment is terminated by the Company without cause during the 12-month period beginning six months prior to the date of the closing of the fundamental transaction, the executive resigns for good reason during the six-month period preceding the date of the closing of the fundamental transaction, or the executive resigns with or without good reason during the six-month period following the closing of the fundamental transaction, Messrs. Hague and Patterson are entitled to payment of additional compensation at the closing of the fundamental transaction equal to the sum of 24 months of base salary and 100% of annual bonus at target. In addition, Messrs. Hague and Patterson are entitled to reimbursement of the cost of health care benefits to the extent they elect to continue benefits under COBRA (12 months for Mr. Hague and six months for Mr. Patterson). A “fundamental transaction” is defined as: (i) the sale of 50 percent or more of the consolidated assets of the Company and its affiliated companies to an unrelated person, (ii) the sale (including sale of the capital stock of a subsidiary holding intellectual property rights) or licensing to an unrelated person of 50 percent or more (based on fair value) of the intellectual property rights held by the Company and its affiliated companies; (iii) a merger, reorganization, or consolidation pursuant to which the holders of the Company’s outstanding voting power and outstanding stock immediately prior to such transaction do not own a majority of the outstanding voting power and outstanding stock or other equity interests of the resulting or successor entity immediately upon completion of such transaction, (iv) the acquisition of all of the outstanding capital stock of the Company or its primary operating subsidiary by an unrelated person, or (v) any other transaction in which the owners of the outstanding voting power of the Company or its primary operating subsidiary immediately prior to such transaction do not own at least a majority of the outstanding voting power immediately upon completion of the transaction. Based on the current annual base salaries of Messrs. Hague and Patterson, the severance payments upon the occurrence of a fundamental transaction based on salary and bonus are as follow:

 

    Base Salary Severance     Annual Bonus Severance        
Name   Base($)     No. of Months     Total($)     Annual Target($)     No. of Months     Total($)     Total Severance ($)  
                                                         
Richard Hague     450,000       24       900,000       270,000       12       270,000       1,170,000  
Jacob Patterson     275,000       24       550,000       165,000       12       165,000       715,000  

 

The employment agreement with Mr. Hoyler contained the same compensation terms in the event of a “fundamental transaction” as described above for Mr. Hague. After amendment of his employment agreement in August 2022, Mr. Hoyler is entitled to receive a payment of $350,000 if there is a fundamental transaction that closes on or before August 15, 2023.

 

 48 

 

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table shows grants of stock options and grants of unvested stock awards outstanding on the last day of the fiscal year ended December 31, 2022, to each of the executive officers named in the Summary Compensation Table.

 

   Option Awards  Stock Awards 
Name  Option Grant Date  Number of Securities Underlying Unexercised Options Exercisable (#)   Number of Securities Underlying Unexercised Options Unexercisable (#)(1)  

Option Exercise

Price

($)

   Option Expiration Date   Number of Shares or Units of Stock That Have Not Vested (#)(2)   Market Value of Shares or Units of Stock That Have Not Vested ($)(3) 
Hague Richard  4/8/2019   2,600    -    270.50    4/8/2029    -    - 
   4/16/2020   -    -    -    -    767    502 
   4/16/2020   -    -    -    -    2,114    1,385 
   4/16/2021                       1,499    982 
   4/16/2021                       1,499    982 
                                  
Jacob Patterson  1/2/2018   400    -    580.25    1/2/2028    -    - 
   5/31/2018   600    -    646.25    5/30/2028    -    - 
   2/1/2019   400    -    443.00    2/1/2029    -    - 
   4/16/2020   1,666    334    27.50    4/16/2030    -    - 
   4/16/2021   -    -    -    -    1,499    982 
   4/16/2021   -    -    -    -    1,499    982 
                                  
Hoyler Cameron  4/6/2017   3,000    -    328.00    4/6/2027    -    - 
   11/10/2017   2,400    -    614.75    11/10/2027    -    - 
   9/20/2018   2,600    -    503.00    9/20/2028    -    - 
   4/16/2020   -    -    -    -    1,334    874 
   4/16/2020   -    -    -    -    667    437 
   4/16/2021   -    -    -    -    1,499    982 
   4/16/2021   -    -    -    -    1,499    982 

 

(1)The stock options listed for Mr. Patterson vest every three months over a three-year period starting three months after the grant date.

 

(2) All unvested restricted stock units held by Messrs. Hague, Patterson, and Hoyler vest in equal installments every three months during the three-year period following the grant date.

 

(3) Market value is based on closing stock price of $0.6551 on December 31, 2022.

 

Board Compensation

 

The following table shows the total compensation paid or accrued during the fiscal year ended December 31, 2022, to each of our current directors and former directors who served on the Board in 2022.

 

Name 

Fees Earned

or

Paid in Cash

($)

  

Stock

Awards

($)(1)(4)

  

Total

($)

 
             
Peter A. Cohen   171,750    44,283    216,033 
Willie C. Bogan   104,923    44,283    149,206 
Jeff Dyer (2)   97,265    -0-    97,265 
David Seaburg   219,050    44,283    263,333 
Chris Nolet (3)   112,500    44,283    156,783 

 

(1)The figure in this column represents the aggregate grant date fair value for restricted stock awards granted during the reported periods computed in accordance with FASB ASC Topic 718. See Note 12 to our consolidated financial statements presented in this Annual Report on Form 10-K for details as to the assumptions used to determine the grant date fair value of the restricted stock awards.

 

(2) Jeff Dyer stepped down from the Board in September 2022 and re-joined the Board in January 2023.

 

(3) Chris Nolet stepped down from the Board in January 2023.

 

(4)The following table shows the aggregate number of option awards and unvested restricted stock awards outstanding on the last day of the fiscal year ended December 31, 2022, for each of the directors named in the director compensation table.

 

Name 

Option Awards

  

Stock Awards

 
         
Peter A. Cohen   344    50,900 
Willie C. Bogan   7,001    50,900 
Jeff Dyer   10,519    -0- 
David Seaburg   10,000    67,371 
Chris Nolet   12,814    50,900 

 

 49 

 

 

Director Compensation Plans

 

For the nine-month period that began January 1, 2022, non-employee directors were compensated as follows:

 

Each non-employee director receives an annual cash retainer of $125,000;
The Chairman of the Board receives an annual fee of $80,000;
Our Audit Committee Chairman receives an annual fee of $20,000, our Compensation Committee Chairman receives an annual fee of $15,000, and our Nominating and Governance Committee Chairman receives an annual fee of $10,000; and
Non-chair members of our Audit Committee receive an annual fee of $9,000, our Compensation Committee members receive an annual fee of $7,000, and our Nominating and Governance Committee members receive an annual fee of $5,000.

 

For the 12-month period beginning October 1, 2022, the annual compensation payable to non-employee directors is as follows:

 

The Company’s Audit Committee chairperson receives an annual fee of $10,000, the Compensation Committee chairperson receives an annual fee of $7,500, and the Nominating and Governance Committee chairperson receives an annual fee of $5,000, and all such fees are paid quarterly in cash in arrears.
   
Non-chair members of the Company’s Audit Committee receive an annual fee of $4,500, the Compensation Committee non-chair members receive an annual fee of $3,500, and the Nominating and Governance Committee non-chair members receive an annual fee of $2,500, and all such fees are paid quarterly in cash in arrears.
   
The Chairperson of the Board receives an annual fee of $40,000 paid quarterly in cash in arrears.
   
Each non-employee director receives an annual retainer of $50,000 payable in equity (subject to certain limitations described below) under one of the following options selected by the director:

 

Non-qualified stock options that have an exercise price equal to the closing price on the date of grant, time vest in four quarterly installments (in arrears) during the applicable 12-month period and are exercisable for a term of 10 years from the grant date. The number of option shares will be equal to $50,000 divided by the Black-Scholes value on the date of grant.
   
Restricted stock units that vest in four quarterly installments (in arrears) during the applicable 12-month period beginning on the grant date. The number of restricted stock units will be equal to $50,000 divided by the applicable grant date closing price.
   
A combination of non-qualified stock options and restricted stock units that have a total value of $50,000 under the terms described above.

 

The number of stock awards to be granted to the directors for the annual fee shall not exceed, in the aggregate, the number of shares available for awards under stockholder approved equity compensation plans net of a reasonable reserve for other equity compensation needs of the Company for new hires as determined by the Chief Executive Officer (the “Award Limit”), and any portion of the directors’ annual fees that remains unpaid after applying the Award Limit, pro rata, to the directors’ shall be payable quarterly in cash in arrears. As of the date each director recognizes income from the vesting of an equity award, the Company will calculate an approximated income tax burden for the income recognized applying a 37% tax rate and make payment of that amount in cash to each such director within 30 days following the income recognition date.

 

 50 

 

 

In the event a director leaves the Board prior to end of a calendar quarter, cash compensation will be paid, and equity awards will vest, pro rata based on the number of days elapsed during the quarter to and including the day the director’s service ends. Upon a change in control or sales event as defined in the equity incentive plan under which equity awards are granted to a director, the equity awards shall vest in full to the maximum extent permitted under the applicable equity incentive plans.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth information regarding the beneficial ownership of the common stock of the Company as of March 20, 2023, by (i) each person known to the Company to be the beneficial owner of more than 5% of the Company’s common stock, (ii) each of the Company’s current directors, (iii) each NEO identified in “Item 11. Executive Compensation,” above, and (iv) all directors and NEOs as a group. The number of shares of common stock beneficially owned by each person is determined under rules promulgated by the SEC. Under such rules, beneficial ownership includes any shares as to which the person has sole or shared voting power or investment power, and includes any shares that the person has the right to acquire within 60 days of the date as of which the beneficial ownership determination is made. Applicable percentages are based upon 7,323,755 voting shares issued and outstanding as of March 20, 2023, and treating any shares that the holder has the right to acquire within 60 days as outstanding for purposes of computing their ownership percentage. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned, subject to community property laws where applicable, and their addresses are c/o PolarityTE, Inc., 1960 S 4250 W, Salt Lake City, UT 84104.

 

Security Ownership of Certain Beneficial Owners

 

   Number of
Shares of
Common Stock
Beneficially
Owned
  

Percentage of

Common Stock

 
Executive Officers and Directors (1):          
           
Peter A. Cohen   20,312    0.3%
Willie C. Bogan   22,618    0.3%
Jeff Dyer   11,872    0.2%
David Seaburg   73,323    1.0%
Richard Hague   45,337    0.6%
Jacob Patterson   16,878    0.2%
Cameron Hoyler   41,640    0.6%
           
Executive Officers and Directors as a Group (7 persons)   259,197    3.5%
           
Greater than 5% Holders:          

 

(1)For the following persons, the number of shares beneficially owned includes the following number of shares underlying options that are exercisable or restricted share awards expected to vest within 60 days of March 20, 2023: David Seaburg (2,051), Richard Hague (884), Jacob Patterson (667), and Cameron Hoyler (1,501).

 

 51 

 

 

Equity Compensation Plan Information

 

The following table provides information on our compensation plans at December 31, 2022, under which equity securities are authorized for issuance.

 

Plan category  (a) Number of securities to be issued upon exercise of outstanding options, warrants, and rights   (b) Weighted- average exercise price of outstanding options, warrants and rights   (c) Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a)) 
Equity compensation plans approved by security holders   178,511    185.41    14,747 
Equity compensation plans not approved by security holders (1)   3,800   $333.95    -0- 
Total   182,311         14,747 

 

(1)These plans are individual grants of stock options to three employees in connection with their engagement or employment by us. Each stock option is vested. The grant date, number of shares, and exercise price for each stock option granted are as follows:

 

Grant Date  No. of Shares   Exercise Price 
04/06/2017   3,000   $328.00 
04/10/2017   400   $356.25 
04/10/2017   400   $356.25 

 

Item 13. Certain Relationships and Related Transactions and Director Independence

 

Director Independence

 

Our Board is currently comprised of four members. The Board has reviewed the materiality of any relationship that each of our directors has with the Company, either directly or indirectly. Based upon this review, the Board has determined that Peter A. Cohen, Willie C. Bogan, and Jeff Dyer are “independent directors” as defined by the rules of The NASDAQ Stock Market.

 

Certain Relationships and Related Transactions

 

None

 

Item 14. Principal Accountant Fees and Services

 

The following table sets forth the fees billed by EisnerAmper LLP (“EisnerAmper”), for the years ended December 31, 2022 and 2021, for the categories of services indicated.

 

  

Year Ended

December 31,
2022 ($)

  

Year Ended

December 31

2021 ($)

 
Audit Fees   384,535    330,760 
Audit Related Fees        
Tax Fees        
Other Fees        
Total Fees   384,535    330,760 

 

Audit fees consist of fees billed for professional services rendered for the audit of our financial statements and review of interim consolidated financial statements included in quarterly reports and services that are normally provided by the principal accountants relating to statutory and regulatory filings or engagements.

 

Audit related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not included in audit fees.

 

 52 

 

 

Tax fees consist of fees billed for professional services for tax compliance, tax advice, and tax planning. These services include preparation of federal and state income tax returns.

 

Other fees consist of fees for products and services other than the services reported in the categories described above.

 

Audit Committee Pre-approval Policies and Procedures

 

Our Audit Committee assists the Board in overseeing and monitoring the integrity of our financial reporting process, our compliance with legal and regulatory requirements, and the quality of our internal and external audit processes. The role and responsibilities of the Audit Committee are set forth in a written charter adopted by the Board, which is available on our website at www.polarityte.com. The Audit Committee is responsible for selecting, retaining, and determining the compensation of our independent public accountant, pre-approving the services it will perform, and reviewing the performance of the independent public accountant. The Audit Committee reviews with management and our independent public accountant our annual financial statements reported in our Form 10-K and our quarterly financial statements reported in our Forms 10-Q. The Audit Committee reviews and reassesses the charter annually and recommends any changes to the Board for approval. The Audit Committee is responsible for overseeing our overall financial reporting process. In fulfilling its responsibilities for the financial statements for the fiscal year ended December 31, 2022, the Audit Committee took the following actions:

 

reviewed and discussed with management and EisnerAmper the audited financial statements for the fiscal year ended December 31, 2021;
discussed with EisnerAmper the matters required to be discussed in accordance with the rules set forth by the Public Company Accounting Oversight Board (“PCAOB”), relating to the conduct of the audit;
received written disclosures and the letter from EisnerAmper regarding its independence as required by applicable requirements of the PCAOB regarding EisnerAmper’s communications with the Audit Committee and the Audit Committee further discussed with EisnerAmper its independence; and
considered the status of pending litigation, taxation matters, and other areas of oversight relating to the financial reporting and audit process that the Audit Committee determined appropriate.

 

Our Audit Committee pre-approved all services that our independent accountants provided to us for the years ended December 31, 2022 and 2021.

 

PART IV

 

Item 15. Exhibits, Financial Statement Schedules

 

(1) Financial Statements.

 

The financial statements required by Item 15 are submitted in a separate section of this report, beginning on Page F-1, incorporated herein and made a part hereof.

 

(2) Financial Statement Schedules.

 

Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or notes thereto.

 

(3) Exhibits.

 

The following index lists the exhibits that are filed with this report or incorporated by reference, as noted:

 

3.1   (Third) Restated Certificate of Incorporation of PolarityTE, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on October 1, 2021)
3.2   Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on March 17, 2022)

 

 53 

 

 

3.3   Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on March 17, 2022)
3.4   Certificate of Amendment of the (Third) Restated Certificate of Incorporation Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on May 16, 2022)
3.5   Certificate of Elimination of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 16, 2022)
3.6   PolarityTE, Inc., Amended and Restated Bylaws - September 28, 2021 (incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on October 1, 2021)
4.1   Form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on February 14, 2020)
4.2   Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on February 14, 2020)
4.3   Form of letter agreement for repricing of common stock warrants issued February 14, 2020 (incorporated by reference to Exhibit 99.1 to our Form 8-K filed with the SEC on November 23, 2020)
4.4   Form of Series A Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on December 23, 2020)
4.5   Form of Series B Pre-Funded Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on December 23, 2020)
4.6   Form of Placement Agent Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on December 23, 2020)
4.7   Form of Series A Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on January 14, 2021)
4.8   Form of Series B Pre-Funded Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on January 14, 2021)
4.9   Form of Placement Agent Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on January 14, 2021)
4.10   Form of Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on January 26, 2021)
4.11   Form of Placement Agent Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on January 26, 2021)
4.12   Form of Common Warrant – March 2022 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on March 17, 2022)
4.13   Form of Placement Agent Warrant – March 2022 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on March 17, 2022)
4.14   Form of Pre-Funded Common Stock Purchase Warrant – Registered Direct Offering (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on June 8, 2022)
4.15   Form of Pre-Funded Common Stock Purchase Warrant – Private Placement Offering (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on June 8, 2022)
4.16   Form of Preferred Investment Option (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on June 8, 2022)
4.17   Form of Placement Agent Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.4 to our Form 8-K filed with the SEC on June 8, 2022)
4.18   Description of Securities (incorporated by reference to Exhibit 4.13 to our Form 10-K filed with the SEC on March 30, 2021)
#10.1   Employment Agreement with Richard Hague (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with the SEC on May 10, 2019)
#10.2   Amendment No. 1 to Employment Agreement with Richard Hague (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with the SEC on August 8, 2019)
#10.3   Form of Notice of Restricted Stock Grant and Restricted Stock Award Agreement under the 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to our Form 10-Q filed with the SEC on August 8, 2019)
#10.4   Form of Restricted Stock Unit Agreement – 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to our Form 10-K filed with the SEC on January 14, 2019)
#10.5   Form of Stock Option Agreement – 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.21 to our Form 10-K filed with the SEC on January 14, 2019)
#10.6   Form of Restricted Stock Unit Agreement – 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 to our Form 10-K filed with the SEC on January 14, 2019)
#10.7   Form of Stock Option Agreement – 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.23 to our Form 10-K filed with the SEC on January 14, 2019)

 

 54 

 

 

#10.8   PolarityTE 2017 Equity Incentive Plan (incorporated by reference to Appendix A of our proxy statement filed with the SEC on February 24, 2017)
#10.9   PolarityTE 2019 Equity Incentive Plan (incorporated by reference to Exhibit 99.2 to our Form S-8 registration Statement filed with the SEC on October 5, 2018)
#10.10   PolarityTE 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to our Form S-8 registration Statement filed with the SEC on October 5, 2018)
#10.11   PolarityTE 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 99.1 to our Form 8-K filed with the SEC on December 29, 2020)
#10.12   Form of Incentive Stock Option Agreement – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.17 to our Form 10-K filed with the SEC on March 12, 2020)
#10.13   Form of Non-qualified Stock Option Agreement – Non-employee Directors – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.18 to our Form 10-K filed with the SEC on March 12, 2020)
#10.14   Form of Non-qualified Stock Option Agreement – Employees – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.19 to our Form 10-K filed with the SEC on March 12, 2020)
#10.15   Form of Non-qualified Stock Option Agreement – Consultants – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.20 to our Form 10-K filed with the SEC on March 12, 2020)
#10.16   Form of Restricted Stock Award – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.21 to our Form 10-K filed with the SEC on March 12, 2020)
#10.17   Form of Restricted Stock Unit Award – Non-employee Directors - 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.22 to our Form 10-K filed with the SEC on March 12, 2020)
#10.18   Form of Restricted Stock Unit Award – Employees - 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.23 to our Form 10-K filed with the SEC on March 12, 2020)
#10.19   Settlement Terms Agreement dated August 21, 2019, between Denver Lough and the Company (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with the SEC on November 12, 2019)
#10.20   Form of Indemnification Agreement for directors and officers (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on March 25, 2020)
#10.21   Employment Agreement with Richard Hague dated August 18, 2021 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on August 24, 2021)
#10.22   Employment Agreement with Cameron Hoyler dated August 18, 2021 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on August 24, 2021)
#10.23   Employment Agreement with Jacob Patterson dated August 18, 2021 (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on August 24, 2021)
#10.24   Consulting Agreement with David Seaburg dated September 1, 2021 (incorporated by reference to Exhibit 10.4 to our Form 10-Q filed with the SEC on November 10, 2021)
#10.25   Amendment No. 1 Effective August 15, 2022, to Executive Employment Agreement with Cameron Hoyler (incorporated by reference to Exhibit 10.8 to our Form 10-Q filed with the SEC on August 11, 2022)
10.26   Commercial Lease Agreement by and Between the Company and Adcomp LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on December 29, 2017)
10.27   Note and Loan Agreement dated April 12, 2020, between PolarityTE MD, Inc., and KeyBank National Association (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on April 15, 2020)
10.28   Form of Securities Purchase Agreement dated January 11, 2021 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on January 14, 2021)
10.29   Form of letter agreement for exercise of Series A Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on January 26, 2021)
10.30   Purchase and Sale Agreement between PolarityTE, Inc., and BCG Acquisitions LLC (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on December 17, 2021)
10.31   Purchase and Sale Agreement between PolarityTE, Inc., and Adcomp LLC (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on March 15, 2022)
10.32   Amendment No. 1 to Purchase and Sale Agreement between PolarityTE, Inc., and BCG Acquisitions LLC (incorporated by reference to Exhibit 10.4 to our Form 8-K filed with the SEC on March 15, 2022)
10.33   Addendum to Purchase and Sale Agreement between PolarityTE, Inc., and BCG Acquisitions, Inc., dated November 9, 2022 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on December 1, 2022)
10.34   Form of Securities Purchase Agreement dated March 15, 2022 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on March 17, 2022)

 

 55 

 

 

10.35   Form of Warrant Amendment Agreement dated March 15, 2022 (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on March 17, 2022)
10.36   Stock Purchase Agreement between Utah CRO Services, Inc., and JP Lawrence Biomedical, Inc., dated April 14, 2022 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on April 18, 2022)
10.37   Real Estate Purchase and Sale Agreement between IBEX Property LLC, and JP Lawrence Land and Building LLC, dated April 14, 2022 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on April 18, 2022)
10.38   Promissory Note dated April 28, 2022, made by JP Lawrence Biomedical, Inc., in the principal amount of $400,000 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on May 2, 2022)
10.39   Form of Registered Direct Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on June 8, 2022)
10.40   Form of Private Placement Securities Purchase Agreement (incorporated by reference to Exhibit 10.2 to our Form 8-K filed with the SEC on June 8, 2022)
10.41   Form of Registration Rights Agreement (incorporated by reference to Exhibit 10.3 to our Form 8-K filed with the SEC on June 8, 2022)
10.42   Lease Agreement between 1960 South 4250 West LLC and PolarityTE MD, Inc., dated December 1, 2022 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on December 1, 2022)
*21.1   Subsidiaries
*23.1   Consent of Independent Registered Public Accounting Firm
*31.1   Certification Pursuant to Rule 13a-14(a)
*31.2   Certification Pursuant to Rule 13a-14(a)
*32.1   Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code

 

*101.INS Inline EXBRL Instance Document
*101.SCH Inline XBRL Taxonomy Extension Schema Document
*101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document
*101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
*104 Cover Page Interactive Data File

 

# Constitutes a management contract, compensatory plan, or arrangement.
* Filed herewith.

 

Item 16. Form 10-K Summary.

 

Not Applicable.

 

 56 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  POLARITYTE, INC.
     
  By: /s/ Richard Hague
   

Chief Executive Officer

(Principal Executive Officer)

     
  Date: March 27, 2023
     
  By: /s/ Jacob Patterson
    Chief Financial Officer (Principal Financial and Accounting Officer)
     
  Date: March 27, 2023

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature   Title   Date
         
/s/ Peter A. Cohen   Chairman of the Board of Directors   March 27, 2023
Peter A. Cohen        
         
/s/ Willie C. Bogan   Director   March 27, 2023
Willie C. Bogan        
         
/s/ Jeff Dyer   Director   March 27, 2023
Jeff Dyer        
         
/s/ David Seaburg   Director   March 27, 2023
David Seaburg        

 

 57 

 

 

POLARITYTE, INC. AND SUBSIDIARIES

 

Consolidated Financial Statements

 

TABLE OF CONTENTS

 

  Page
Report of Independent Registered Public Accounting Firm, EisnerAmper LLP, Iselin, New Jersey, PCAOB ID 274 F-1
Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3
Consolidated Statements of Operations for the Years Ended December 31, 2022 and December 31, 2021 F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2022 and December 31, 2021 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and December 31, 2021 F-6
Notes to Consolidated Financial Statements F-7

 

 58 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

PolarityTE, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of PolarityTE, Inc. and Subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has recurring losses and negative cash flows from operating activities that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Accounting for Common Stock Warrant Liability Valuation

 

As discussed in Note 13 to the financial statements, the Company issued common stock warrants to purchasers of its common stock. The warrants are classified as liabilities, as they could require cash settlement in certain scenarios, and are recorded at fair value in the Company’s consolidated balance sheet with a fair value of approximately $1,489,000 as of December 31, 2022. The Company recorded a gain on the change in fair value of the common stock warrant liability of approximately $14,468,000 in its consolidated statement of operations for the year ended December 31, 2022. Management utilized the Monte Carlo Simulation model to estimate the fair value of each warrant on the date of issuance and at each interim and annual reporting date until settled or classified as equity. Estimates and assumptions impacting the fair value measurement include simulated future stock price amounts over the remaining life of the commitment, as well as estimated change of control considerations. This valuation technique involves a significant amount of estimation and judgment. In general, the assumptions used in calculating the fair value of the common stock warrant liability represent management’s best estimate, but the estimate involves inherent uncertainties and the application of significant management judgment.

 

F-1

 

 

We identified the valuation of common stock warrant liability as a critical audit matter due to (i) the significant management judgment and subjectivity in developing the assumptions to the models utilized and (ii) the complexity of the Monte Carlo Simulation model used to determine fair value. This in turn led to a high degree of auditor judgment and subjectivity. We also applied significant judgment in performing our audit procedures which involved the use of valuation professionals with specialized skill and knowledge to evaluate the audit evidence obtained from the audit procedures performed, in particular, to evaluate the reasonableness of management’s valuation technique, as well as certain inputs and assumptions used within the model.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls relating to the Company’s valuation of the common stock warrant liability. Our procedures also included, among others, (i) use of a valuation specialist in evaluating management’s process for selecting the appropriate valuation models and techniques and assumptions used as inputs to those valuation models and (ii) testing the completeness, mathematical accuracy, and relevance of underlying data used in the models and calculations.

 

Accounting for Sale and Leaseback Transaction

 

As discussed in Note 8 to the financial statements, the Company exercised its purchase option under its lease for commercial office/warehouse space located in Salt Lake City, UT. Following the purchase, the Company immediately sold the property to a third party and subsequently leased back a portion of the building located on the property. The transaction was accounted for as a sale and leaseback in accordance with ASC 842, Leases. The Company recorded an increase to its right of use asset of $4,000,000 representing a lease prepayment, and a corresponding gain on sale of the property of $4,000,000 to adjust for the off-market terms in accounting for the sale and leaseback transaction since the fair value of the property was in excess of the sales price of the property. Management used a third-party valuation firm to estimate the fair value of the property on the date of sale. Estimates and assumptions impacting the fair value of the property included, but were not limited to, sale prices of comparable office/warehouse buildings, capitalization rates, and selection of valuation methodology for concluded fair value. Management determined the “as is” valuation methodology to be the most relevant as the building sold was sold in an “as is” condition without any renovations. The estimate of the fair value of the property involved a significant amount of judgment. The assumptions used in calculating the fair value of the property represent management’s best estimate, but the estimate involves inherent uncertainties and the application of significant management judgment. Accounting for the transaction as a sale and leaseback also involves a significant amount of judgment in determining whether all of the criteria under ASC 842-40 were met.

 

We identified the accounting for the sale and leaseback transaction as a critical audit matter due to (i) the significant management judgment and subjectivity in developing the assumptions to the models utilized to estimate the fair value of the property; and (ii) the subjectivity in assessing the sale and leaseback criteria to determine whether all of the relevant criteria have been met. This in turn led to a high degree of auditor judgment and subjectivity. We also applied significant judgment in performing our audit procedures which involved the use of valuation professionals with specialized skill and knowledge to evaluate the audit evidence obtained from the audit procedures performed, in particular to evaluate the reasonableness of management’s valuation technique and assumptions.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls relating to the Company’s accounting for the sale and leaseback transaction. Our procedures also included, among others, (i) use of a valuation specialist in evaluating management’s process for selecting the appropriate valuation models and techniques and assumptions used as inputs to those valuation models; (ii) testing the completeness, mathematical accuracy, and relevance of underlying data used in the models and calculations; and (iii) evaluating the appropriate accounting for the transaction based upon the criteria in ASC 842-40 and applying our understanding of the applicable provisions of U.S. GAAP.

 

/s/ EisnerAmper LLP

 

We have served as the Company’s auditor since 2010. Partners of Amper, Politziner & Mattia LLP joined EisnerAmper LLP in 2010. Amper, Politziner & Mattia LLP had served as the Company’s auditor since 2009.

 

EISNERAMPER LLP

Iselin, New Jersey

March 27, 2023

 

F-2

 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

   December 31, 2022   December 31, 2021 
         
ASSETS          
Current assets          
Cash and cash equivalents  $11,446   $19,375 
Accounts receivable, net       978 
Assets held for sale   700    441 
Prepaid expenses and other current assets   1,109    1,595 
Total current assets   13,255    22,389 
Property and equipment, net   1,775    6,923 
Operating lease right-of-use assets   6,906    1,146 
Other assets   911    720 
TOTAL ASSETS  $22,847   $31,178 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities          
Accounts payable and accrued expenses  $1,380   $3,115 
Other current liabilities   687    1,520 
Deferred revenue       74 
Total current liabilities   2,067    4,709 
Common stock warrant liability   1,489    6,844 
Operating lease liabilities   2,632    43 
Finance lease liabilities   41    338 
Total liabilities   6,229    11,934 
           
Commitments and Contingencies (Note 17)   -    - 
           
STOCKHOLDERS’ EQUITY          
Preferred stock – 25,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2022 and 2021        
Common stock - $.001 par value; 250,000,000 shares authorized; 7,258,186 and 3,299,379 shares issued and outstanding at December 31, 2022 and 2021, respectively*   7    3 
Additional paid-in capital   532,842    527,639 
Accumulated deficit   (516,231)   (508,398)
Total stockholders’ equity   16,618    19,244 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $22,847   $31,178 

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-3

 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

   2022   2021 
   For the Years Ended December 31, 
   2022   2021 
Net revenues          
Products  $   $3,076 
Services   814    6,328 
Total net revenues   814    9,404 
Cost of revenues          
Products       448 
Services   616    3,868 
Total costs of revenues   616    4,316 
Gross profit   198    5,088 
Operating costs and expenses          
Research and development   11,048    14,182 
General and administrative   15,027    20,476 
Sales and marketing       2,808 
Restructuring and other charges   103    678 
Gain on sale of property and equipment   (4,000)    
Impairment of assets held for sale   393     
Impairment of goodwill and intangible assets       630 
Total operating costs and expenses   22,571    38,774 
Operating loss   (22,373)   (33,686)
Other income (expense), net          
Gain on extinguishment of debt       3,612 
Change in fair value of common stock warrant liability   14,468    4,995 
Inducement loss on sale of liability classified warrants       (5,197)
Interest expense, net   (11)   (127)
Other income, net   83    216 
Net loss  $(7,833)  $(30,187)
           
Net loss per share attributable to common stockholders          
Basic*  $(1.14)  $(9.43)
Diluted*  $(1.67)  $(9.43)
Weighted average shares outstanding          
Basic*   6,853,169    3,200,561 
Diluted*   7,665,190    3,200,561 

 

* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on May 16, 2022

 

The accompanying notes are an integral part of these consolidated financial statements

 

F-4

 

 

POLARITYTE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

 

   Number   Amount   Number   Amount *